“Payday loans” are dischargeable in either a Chapter 7 or Chapter 13 bankruptcy. For those who have never been desperate enough to take out a payday loan, stay away from them. These are small, short-term, high-interest loans that typically come due on your next payday. Their mechanics are quite simple, and start with the lender providing the borrower with cash for the loan amount. The lender gets repaid by the borrower giving the lender either (1) their check in the amount of the loan PLUS the lender’s fees, which the lender holds until your next payday, or (2) their checking account information and numbers so that the loan amount PLUS the lender’s fees can be withdrawn on your next payday, using the Automated Clearing House (ACH). The fees initially charged make these loans very expensive to begin with, but things get really rocky if you lack the funds to repay the loan and fees on the next payday, which is the situation that cash-strapped people frequently find themselves in. In this instance the lender will frequently “roll over”, or renew, the loan and exact more fees and charges in the process, with the “renewed” loan becoming due on your next payday. This vicious, insidious cycle can replay itself over and over again, and can result in truly exorbitant fees and charges being paid over the term of the loan. In instances where the borrower’s bank account lacks sufficient funds, things can get really ugly if the payday lender continues to attempt withdrawals, resulting in numerous overdraft charges and general mayhem with the borrower’s account.
“Payday loans” are essentially illegal in New York, where the civil usury cap is 16% and the criminal usury cap is 25%. Given these regulatory caps, how do payday lenders operate in New York? Typically, the payday lender will partner with a bank located in a deregulated state, and conduct their business online from remote locations. The Internet is a truly wonderful tool, but it can also bring misery to your door from far off places, and “payday loans” are a classic example of this.
Despite the threats that you may receive from debt collectors, it is important to know that you cannot be arrested for failing to pay a “payday loan”, or any other type of loan. In fact, the Fair Debt Collections Act makes it unlawful for debt collectors to threaten you with arrest, although some debt collectors are so sleazy that such prohibitions are ignored.
An experienced and competent bankruptcy attorney can easily rid you of these predatory lenders, but the best advice is to avoid dealing with them in the first place.