People take a lot of desperate measures to avoid going into bankruptcy. One extremely common and highly risky option is to take out a payday loan. Unfortunately, many people find that even after they have taken out a payday loan, they are still unable to get out from under their looming financial troubles.

If you have taken out a payday loan, you are familiar with the high-interest rates involved with repayment. If you have defaulted on your loan, you might also be familiar with the unforgiving debt collectors who relentlessly try to intimidate you.

Having gotten so deep into debt, bankruptcy might be your best option. But can payday loans be included in bankruptcy?

Can Payday Loans Be Included in Bankruptcy?

Payday advances or cash advance loans are other names for payday loans. You may have spotted the bright signs advertising the hundreds of payday loan/check cashing businesses across Southern California.

These money lenders generally offer short-term, high-interest loans that you’re expected to pay back on your next payday.  They can also be secured with other income such as a pension or Social Security check arrival. These loans don’t often exceed $500.

Payment is usually supplied by the debtor by writing a post-dated check or authorizing an electronic debit that allows the creditor to withdraw the owed money at the agreed-upon time.

Calculator and pen beside an accounting document

Payday Loans and Chapter 7 Bankruptcy Discharge

In Chapter 7 Bankruptcy, filers hope to earn a discharge of unsecured debt by the end of the process. Discharge means the debt is forgiven and doesn’t get repaid. Unsecured debt includes anything not backed by property or collateral. This can include medical care debt and credit card balances.

Payday loans can be considered unsecured debt and be eligible for discharge, but there are important exceptions. You’ll need to stay aware of these exceptions when deciding if bankruptcy will clear your payday advance debt.

Payday Loans Secured Just Before Bankruptcy

You can find yourself stuck with the bill when you take out a payday loan shortly before filing for bankruptcy.

The “presumptive fraud rule” applies to cash advances taken within 70 to 90 days of filing bankruptcy. Transactions completed in this time span are usually “presumed fraud.” You are forced to repay that money and it won’t get included in the discharge.

This mandate is in place to discourage people from charging up a lot of debt when they know they’re heading for bankruptcy, thinking they won’t have to pay any of it back.

Automatic Renewals on Payday Loans

Payday loans come with high interest rates and other fees, but that’s not the only downside they hold. Many cash advances renew each month. The loan conditions reboot if you haven’t paid back the full amount of your loan.

This is a defense to prevent you from escaping a cash advance loan through bankruptcy. Your loan will always be in the range of the 70 to 90 period since it keeps renewing and will get viewed as “presumptive fraud.” This keeps it from being eligible for discharge.

Automatic Stay Workaround

Even if a payday loan qualifies for discharge, there is another tactic lenders can turn to. Once you file your bankruptcy, your creditors are notified of an “automatic stay.” The protection means they can’t call you or try to collect your debt anymore.

However, since you provide payday lenders with a post-dated check, they can attempt to cash it at any time. As long as the account is still open, they can attempt to collect the money in arrears.

The Threat of a Bad Check

When you attempt to close out the account for the check you’ve written, you might be threatened with legal action. Lenders may claim you’ve written a bad check or illegally prevented them from collecting the money electronically. Writing a bad check can result in misdemeanor or felony charges.

However, this claim by the creditor usually doesn’t hold much water in court. It’s usually shown that the lender knew the person writing the check might not be able to pay the loan back. The business is usually found to have willingly accepted a bad check.

Hand writing on a check

Bankruptcy Fine Print in Payday Loan Agreements

A check cashing loan agreement may contain language that states you can’t seek to discharge the money you owe through bankruptcy. This type of clause is not admissible in court.

Your bankruptcy judge would throw out the provision. Your debt would remain eligible for discharge once your bankruptcy is complete.

Payday Loans and Chapter 13 Bankruptcy

If you feel that Chapter 13 bankruptcy is the better option for you, there is some relief from payday loan debt available.

Chapter 13 bankruptcy involves you and your bankruptcy attorney proposing a payment plan to repay a portion of your debt. This payment schedule lasts between three to five years. At the end of the plan, some debt is also discharged as in a Chapter 7 bankruptcy.

Your payday loans are eligible to add to the debt repayment plan that Chapter 13 requires. You’d likely only have to pay back an agreed-upon portion of your loan debt over three to five years.

Contact a Los Angeles Bankruptcy Lawyer Serving Southern California

Some factors can make carrying payday loans into bankruptcy even trickier and it’s important you rely on a bankruptcy expert to determine what exactly will happen to your debt. You don’t want uncertainty over your payday loans and other debt spoiling your chances to reach financial freedom through bankruptcy.

People going through a financial storm may think payday lenders can offer a life raft. This is almost never the case, and taking out a check cashing loan usually only makes things worse. To explore potential ways to find relief from your debt, talk with a bankruptcy expert at the Law Offices of Steers & Associates in Los Angeles and serve all of Southern California. We offer free case evaluations so that you can feel empowered as you regain control of your financial circumstances. Contact us today.