Can I File Bankruptcy on Payday Loans?

Bankruptcy is a legal process designed to help individuals and businesses manage or eliminate overwhelming debt. It provides a structured pathway for debtors to address financial distress and gain a fresh start. Payday loans, characterized as short-term, high-interest loans, can often contribute significantly to a cycle of debt. This article explores how payday loans are addressed within the bankruptcy framework.

Eligibility and Types of Bankruptcy for Payday Loans

Individuals seeking to address unmanageable debt, including payday loans, consider two main types of consumer bankruptcy: Chapter 7 and Chapter 13. Chapter 7 bankruptcy, often referred to as liquidation bankruptcy, involves the discharge of most unsecured debts, such as credit card balances and medical bills, without a repayment plan. This option is suited for individuals with lower incomes and limited assets. Eligibility for Chapter 7 is determined by a “means test,” which compares an individual’s income to the median income for their state. If income exceeds the median, a more detailed calculation assesses disposable income to determine if the individual can repay their debts.

Chapter 13 bankruptcy, known as reorganization bankruptcy, allows individuals with a regular income to propose a repayment plan to their creditors over three to five years. This option enables debtors to keep their assets while making structured payments. To qualify for Chapter 13, individuals must have unsecured debts below $465,275 and secured debts less than $1,395,875. Both Chapter 7 and Chapter 13 address unsecured debts, including payday loans.

How Payday Loans are Treated in Bankruptcy

Payday loans are considered unsecured debt, similar to credit card debt, and are dischargeable in both Chapter 7 and Chapter 13 bankruptcy. There is no special protection for payday lenders under bankruptcy law. However, a significant consideration involves loans or cash advances taken shortly before filing for bankruptcy.

A “presumption of fraud” may arise if an individual takes out cash advances totaling $1,100 or more from a single creditor within 70 days of filing for bankruptcy. This creates a presumption that the debt was incurred with no intent to repay it. If this presumption applies, the payday lender can object to the debt’s discharge, and the debt may be deemed non-dischargeable unless the debtor can demonstrate otherwise. Overcoming this presumption requires providing evidence of no fraudulent intent at the time the loan was taken, or waiting until the 70-day period expires before filing. In a Chapter 13 plan, even if the presumption of fraud applies, the payday loan debt can be included in the repayment plan, potentially allowing for partial or no payment depending on the plan’s structure, with any remaining balance discharged upon completion.

Steps to File for Bankruptcy

The process of filing for bankruptcy begins with mandatory pre-filing credit counseling from an approved agency. This counseling session helps individuals understand their financial situation and explore alternatives to bankruptcy. The counseling must be completed within 180 days before the bankruptcy petition is filed, and a certificate of completion is required.

Following credit counseling, the next step involves preparing and filing the bankruptcy petition and supporting schedules with the court. These documents detail the debtor’s assets, liabilities, income, and expenses. After filing, debtors must attend a Meeting of Creditors, also known as the 341 meeting, where a bankruptcy trustee and creditors can ask questions about the debtor’s financial affairs. Debtors are also required to complete a financial management course after filing but before their debts are discharged. Upon successful completion of all requirements, including the repayment plan in Chapter 13 or the liquidation process in Chapter 7, the court issues a discharge order, releasing the debtor from qualifying debts.