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How Are Payday Loans and Cash Advances Treated in Bankruptcy?

dhester from morguefile.comThe term “payday loan” refers to a financial transaction in which a lender makes an unsecured loan, usually of a relatively small amount of money, to a borrower at a high rate of interest and for a very short term. The name comes from a requirement by many lenders that borrowers repay the loan amount and interest from their next paycheck. Payday loans may present special challenges to a debtor, depending on the debtor’s circumstances and the terms of the agreement with the lender.

Payday lenders, who may also use terms like “cash advances” and “check cashing” for their business model, offer certain advantages over other forms of credit. Someone who needs money quickly, due to an emergency situation, is likely to get money far more quickly from a payday lender than from a bank. A person with a poor credit score may still be able to obtain a payday loan if they can show employment history and steady income. A typical payday loan includes the borrower’s agreement to make periodic payments to the lender, or to pay the amount back in full from a future paycheck. The borrower pays a fee to the lender that is similar to a significantly high rate of interest. The lender may require the borrower to provide a post-dated check for the total amount owed, or to provide bank account wire transfer information.

In a Chapter 7 or Chapter 13 bankruptcy case, payday loans are considered low-priority unsecured loans. At least two challenges may arise with regard to payday loans. The lender may challenge the dischargeability of the debt based on factors common to such loans. Additionally, if the borrower provided a postdated check to the lender, the automatic stay might not prevent the lender from collecting on the loan.

The short-term nature of many payday loans may cause problems for a debtor seeking discharge of the debt. Bankruptcy law generally prohibits discharge of consumer debts incurred up to ninety days, or cash advances made up to seventy days, prior to the bankruptcy filing date. 11 U.S.C. § 523(a)(2)(C). It also prohibits the discharge of debts incurred through fraud. 11 U.S.C. § 523(a)(2)(A). A lender may be able to challenge the discharge of a payday loan based on the timing of the loan or cash advance, or by alleging that the borrower never intended to repay the loan.

The use of a post-dated check can also cause problems in a bankruptcy proceeding. The automatic stay does not stop an action involving the “presentment of a negotiable instrument,” like a check. 11 U.S.C. § 362(b)(11). At least one bankruptcy court in this circuit has held that presentment of a debtor’s post-dated check during a bankruptcy case does not violate the automatic stay. In re Kearns, 432 B.R. 276 (Bankr. D. Id. 2010). A wire transfer using bank information provided by the debtor, according to another court, does violate the automatic stay. In re Snowden, 422 B.R. 737 (Bankr. W.D. Wash. 2009).

Bankruptcy attorney Devin Sawdayi has represented the people of Los Angeles area in personal bankruptcy cases since 1997. We help individuals and families in financial distress through the bankruptcy process, which might involve liquidating assets to make payments or creating a more manageable payment schedule. We are committed to representing our clients and helping them rebuild their finances with dignity and respect. Please contact us today online or at (310) 475-9399 to schedule a free and confidential consultation.

More Blog Posts:

Court Addresses Dischargeability of Debts Resulting from “Willful and Malicious Injury” by the Debtor, Los Angeles Bankruptcy Lawyer Blawg, October 3, 2013

California Bankruptcy Court Rules on Discharge of Debt Allegedly Incurred Through Fraud, Los Angeles Bankruptcy Lawyer Blawg, September 7, 2013

The Effects of Bankruptcy on Your Credit Score, Los Angeles Bankruptcy Lawyer Blawg, August 14, 2013

Photo credit: dhester from morguefile.com.