The 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. Continue reading