When you don’t have enough income to pay all of your bills each month, it can be tempting to use payday loans to bridge the gap. But payday loans are expensive, and many people find themselves taking out additional loans the following month. If you’re regularly relying on payday loans, filing for bankruptcy can help you wipe out the debt and break the cycle.
What Is a Payday Loan?
Payday loans are high-interest short-term loans, usually from $100 to $1,000, used to tide you over until you get paid. In truth, however, it’s difficult for most people to pull together enough money to pay the loan off when they get their next paycheck, and many people resort to taking additional payday loans just to service the ones they already have.
The problem is that over the course of weeks, you'll pay an amount that will easily exceed the principal originally borrowed. Instead of being helped, borrowers are often thrust into a downward financial spiral.
Bankruptcy Gets Rid of Payday Loans
Bankruptcy can provide permanent relief by erasing debt from payday loans, as well as credit accounts, medical bills, and other types of debt.
Most often, individual borrowers file one of two types of bankruptcy:
Payday Loans in Chapter 7 Bankruptcy
Here’s what you can expect to happen in a Chapter 7 case.
- Qualifying for Chapter 7 bankruptcy. Payday loans and other debts can be discharged (forgiven) in as few as four to six months. But first, you must meet income qualification requirements. Your bankruptcy attorney can help.
- Filing a Chapter 7 case. After filing your paperwork with the court, creditors, including payday lenders, must stop their attempts to collect your debt. The court appoints a trustee who will review your case and ask you questions at a hearing called a 341 meeting of creditors to confirm the information you provided in your paperwork.
- Protecting property in a Chapter 7 case. In exchange for discharge of your payday loans and other debts, the court may take some of your property to sell to pay your creditors, although that's rare. You’re allowed to keep property like most household goods, furniture, electronics, clothing, tools, and medical equipment. You will probably also be able to keep your car, and you might be able to keep your home or some portion of the equity you have in a homestead.
- Discharging payday loans and other debts. If no issues arise in your case, the court will issue an order discharging your qualifying debts. A bankruptcy lawyer can explain whether any of your obligations could survive the bankruptcy case.
Payday Loans in Chapter 13 Bankruptcy
If you don’t qualify for a Chapter 7 bankruptcy, or if you want to keep property that you’d lose in a Chapter 7 matter, you’ll likely consider filing a Chapter 13 case.
- Repayment plan. You’ll propose a plan to pay some or all of your debts over the course of three to five years. How much you’ll pay over that time depends on the type of debts you owe and how much money you have each month after deducting income and expenses.
- Confirmation. The trustee, your creditors, and the court will review the plan. If it conforms with bankruptcy requirements, the court will approve (confirm) it.
- Payments. You’ll make payments to a Chapter 13 trustee who will use that money to pay your creditors. The Chapter 13 payment plan can also help you catch up on past due child support, alimony, income taxes, car payments, and house payments. While in the plan, you’ll be protected from creditor action, and once you’ve completed all payments, you’ll receive a discharge of any remaining debt balance.