How to Get Out of Paying Back a Payday Loan

Payday loans are short-term, high-interest loans, typically for small amounts, meant to be repaid by the borrower’s next payday. With repayment periods often around two weeks and APRs frequently exceeding 400%, these loans, combined with fees and single balloon payments, can quickly lead borrowers into a cycle of debt.

Challenging Payday Loan Enforceability

A payday loan’s enforceability can be challenged if the lender did not adhere to applicable regulations. This may render the loan void or unenforceable from its origin.

Usury Laws

Violation of usury laws is a common ground for challenging a payday loan. These laws set maximum interest rates, varying by state, often around 36% APR. If a payday loan’s APR exceeds the legal limit in the state where it originated, the loan may be considered usurious and unenforceable. Borrowers can compare their loan’s APR to state limits to identify violations.

Lender Licensing

Lender licensing is another aspect for challenging enforceability. Payday lenders must be licensed by state authorities to operate legally. If a lender, especially an online one, is not licensed in the borrower’s state, the loan may be illegal and uncollectible. Borrowers can verify licensing through their state’s attorney general’s office or financial regulation agency.

Fraud or Misrepresentation

Fraud or misrepresentation by the lender can invalidate a loan agreement. If loan terms were misrepresented or the agreement was fraudulent, the contract may be voidable. This includes deceptive practices regarding fees, interest rates, or repayment schedules. Such actions undermine a valid contract, allowing the borrower to argue the agreement is not binding.

State-Specific Laws

State-specific payday loan laws impose restrictions that, if violated, can impact a loan’s enforceability. These include limits on loan amounts, prohibitions on rollovers, or requirements for cooling-off periods. Some states limit outstanding loans or mandate extended repayment plans. Non-compliance with these rules can provide grounds to challenge the loan’s validity.

Utilizing Formal Debt Relief Procedures

Formal debt relief procedures, like bankruptcy, offer structured pathways to address financial obligations, including payday loans. Payday loans are unsecured debts, similar to credit card balances, making them eligible for discharge in bankruptcy.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy, or “liquidation bankruptcy,” directly discharges many unsecured debts. Qualification requires passing a “means test,” evaluating income against the state’s median. If income is below the median, or disposable income is insufficient after expenses, one may be eligible. A bankruptcy trustee oversees the process, and most unsecured debts, including payday loans, are typically eliminated within three to six months.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy, or “reorganization bankruptcy,” involves a three-to-five-year repayment plan. This option suits individuals with steady income who need to restructure debts while retaining assets. Payday loan debt can be included, and the amount repaid may be reduced. After completing the plan, any remaining unsecured debt, including payday loans, may be discharged. Chapter 13 allows borrowers to keep property, like a home or vehicle, while addressing obligations.

Comparison and Caveats

Both Chapter 7 and Chapter 13 offer relief, with the choice depending on financial situation. Chapter 7 provides quicker discharge for those with limited income and assets. Chapter 13 offers structured repayment for those with consistent earnings protecting assets. Taking a payday loan shortly before bankruptcy (within 70-90 days) might lead to lender challenges, arguing no intent to repay. However, most payday loans are discharged without issue, as their nature often indicates inability to pay, not fraudulent intent.

Asserting Consumer Rights

Beyond challenging enforceability or pursuing bankruptcy, consumers have rights to address payday loan and debt collection issues. Asserting these rights can provide resolution or protection from abusive conduct.

Right to Rescind

Some state laws grant a limited right to rescind, or cancel, certain loans shortly after signing. If this right exists, it typically allows borrowers to return the principal without fees or interest within a specified period, often one or two business days. Exercising this requires informing the lender in writing and returning loan proceeds or the uncashed check.

Fair Debt Collection Practices Act (FDCPA)

The Fair Debt Collection Practices Act (FDCPA) safeguards consumers from abusive, deceptive, and unfair debt collection practices by third-party collectors. It prohibits harassment, obscene language, threats, or false statements about debt. Collectors are restricted on contact times (generally not before 8:00 a.m. or after 9:00 p.m.) and cannot contact consumers at work if prohibited. Violations can be reported to regulatory bodies, or consumers can sue for damages.

Filing Complaints with Agencies

Filing complaints with consumer protection agencies is an actionable step. The Consumer Financial Protection Bureau (CFPB) accepts complaints about financial products, including payday loans and debt collection. State attorneys general and financial regulators also handle complaints and investigate state law violations. The process involves submitting a detailed written complaint, often online, outlining the issue, lender, and supporting documentation. While agencies may not resolve individual disputes directly, they can investigate misconduct, take enforcement actions, or mediate resolutions.