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Payday Loan Debt and Bankruptcy

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Payday Loan Debt and Bankruptcy

You’ve probably driven past storefronts with bright lights offering quick cash through payday loans. Or maybe you’ve seen the commercials on social media or TV. The companies that offer these short-term loans tout them as a surefire way to get out of a financial bind. Payday loans are incredibly risky. Instead of being helpful, they may cause your debt to spiral out of control. Read on about what payday loans are and why you should think twice before getting one. You’ll also learn how bankruptcy can help if you do find yourself in an untenable financial situation. 

What Is a Payday Loan? 

Payday loans are small, short-term, and high-interest. They are usually due within two to four weeks. To get a payday loan, you need to be at least 18 years old and have a bank account and the ability to verify your identity. You’ll also need to provide the payday loan company access to your checking account funds through a post-dated check or authorization to debit your account. Lenders rarely check your credit, which means you can get a payday loan even if your credit is subpar. 

Laws that regulate payday loans vary from state to state. In Indiana, the maximum loan amount is $536 and payday loan companies can legally charge up to a jaw-dropping 391% annual percentage rate

Why Payday Loans Are Risky 

The National Association of Consumer Advocates considers payday loans as predatory. This means they have “unfair, deceptive, or abusive loan terms that can trap borrowers in a cycle of debt.” Payday loan companies typically target younger consumers, those with lower incomes, and borrowers who have bad credit and nowhere else to turn. 

Payday loan debt can severely damage your credit. You must provide a check upfront, and the loaner will cash that check when it’s due, even if there isn’t enough money in your account. If your check bounces, you will default on the loan. If the lender reports the default to your credit company, it can lower your credit score. Many borrowers must roll their payday loan into another loan to repay the first. The result is a precarious cycle of debt. 

Indiana consumers paid a total of more than $300 million in finance charges to payday loan companies from 2014 to 2019. As of 2019, there were 262 payday loan storefronts in the Hoosier state, disproportionately located in low-income communities and communities of color. The typical payday loan borrower has a median income of just over $19,000 and winds up paying more in fees than they originally borrowed.

Can You File Bankruptcy on Payday Loans?

A common question is, “Does bankruptcy cover payday loans?” There are two kinds of bankruptcy, both of which can be helpful if your payday loan debt has spiraled out of control. 

Chapter 7 bankruptcy, also called liquidation bankruptcy, allows you to discharge all or most of your debt, including payday loan debt. In Chapter 7 a court-appointed trustee can sell some or all your nonexempt property. Nonexempt property varies from state to state. 

Chapter 13 bankruptcy, also known as reorganization bankruptcy, enables you to keep your property. Then you’ll pay off your debt over a period of three to five years using a more affordable, court-mandated payment plan. Your payday loan debt would be part of that plan. 

Compassionate, Non-Judgmental Advice About Bankruptcy and Payday Loan Debt 

If you’re in a bind due to payday loan debt or any other type of financial problem, the attorneys at Sawin & Shea, LLC can answer all of your questions about payday loans and bankruptcy and help determine the best option for you and then walk you through the entire process. We understand that filing for bankruptcy is a distressing proposition. That is why we are committed to helping you get the fresh start you deserve. Let us know how we can help. Give us a call at 317-759-1483 or schedule a free consultation

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