Beware: Payday Loans Often are Not Dischargeable in Bankruptcy

In debt? Mortgage, car loans, credit cards and maybe even some payday loans? Well, don’t think bankruptcy necessarily will be a way out – at least not for the payday loans.

Payday loans, also known as “payday advances,” “cash advances,” and “short-term personal loans,” have become wildly popular in a bad economy for their ease-of-approval (even with bad or over-extended credit) and speedy delivery (often within 24 hours).

But unlike other unsecured debt (e.g,. credit cards), they often cannot be easily discharged in either a Chapter Seven or Chapter 13 personal bankruptcy, according to Michael S. Anderson, an Arizona attorney.

Why payday loans may or may not be dischargeable in bankruptcy

Debts taken on immediately (60-90 days) before a bankruptcy are traditionally held by the courts to have been taken in anticipation of declaring bankruptcy. In other words, you knew you were going to file the bankruptcy but took out the loans anyway, with no intention to repay.

And because these loans usually “renew” themselves every month (for example, if you do not pay the full amount due, but the smaller “service fee” instead, to avoid having to make full repayment at that time), even a loan that you have been paying on for months might be considered by a judge to be “new” because the date of the most recent “re-borrowing” is within the immediate recent period.

But how do you get out from behind the eight ball?

“I have six loans that I’ve been juggling for months,” said Jill Jensen of Rocky River, Ohio. “I just can’t keep this up because even though I’m making the payments it seems like I’m getting nowhere at knocking down the debt.”

No wonder she’s “getting nowhere”: the Federal Trade Commission reports that payday lending firms charge interest rates anywhere from 391 to 980 percent.

Take heart, many courts are coming around

According to the, because these high-interest loans often are viewed as abusive, many courts will look not at the most recent renewal date, but the date at which the string of loans began in order to inform their decisions on whether to include them in the bankruptcy. In other words, in order to discourage these usurious practices on the part of the predatory lenders, the judges will allow the loans to be included in a bankruptcy.

Whatever your situation, an experienced bankruptcy attorney will be best suited to advise you regarding this matter and the nature of the law regarding this in your geographic area. In any case, payday loans remain a gamble – one from which you might or might not be able to recover in personal bankruptcy law.