Vicious Cycle of Payday Loans

Payday loans are an easy way to get cash when money is tight before your next pay day.  However, these loans can create vicious cycle of borrowing money that some people can never stop.

What is a Payday Loan?

Payday loans help holdover an individual until their next pay day.  Typically a lender will will provide a cash loan to an individual, and this loan is for a short period of time.  You can apply for these loans in person or online.  The borrower may promise his or her next paycheck to pay back this loan.  Or the borrower might agree to a repayment plan that is usually connected to how often they get paid.  Some lenders will set up automatic payments with a checking account that the borrower provides during the lending process.  The interest rate these companies charge is typically astronomical when you compare it to the interest rate of a loan from a bank.

How Does Bankruptcy Affect Payday Loans?

Payday loans are unsecured loans; plain and simple.  This loan is tied secured by or attached to any property that the borrowers owns.  Therefore, it is treated just like your credit cards, medical bills, lines of credit, etc.  In Chapter 7 bankruptcy these loans are discharged and no money is typically paid back.  In Chapter 13 bankruptcy these creditors will be paid back according to the repayment plan that is approved by the Court.

Timing of the Payday Loan / Cash Advance

Keep in mind that in Chapter 7 bankruptcy cases there is an opportunity for the payday lenders to object to the dischargeability of their debt.  The Bankruptcy Code sets forth certain debts that your discharge does not apply to.  According to 11 U.S.C. 523(a)(2)(C)(i)(II) “cash advances aggregating more than $750 that are extensions of consumer credit under an open end credit plan obtained by an individual debtor on or within 70 days before the order for relief under this title, are presumed to be nondischargeable.”

If you are caught in the vicious and seemingly endless cycle of payday loans bankruptcy is an option to be seriously considered.