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How Chapter 7 bankruptcy can help to solve payday loan debt

On Behalf of | Jan 15, 2024 | Bankruptcy

Many individuals and families occasionally experience budgetary shortfalls. Unexpected reductions in income or sudden increases in household expenses can leave people struggling to meet all of their financial obligations. Some people decide to accept late fees or use credit cards as a way to overcome short-term financial hardship. Others may turn to payday lenders. Payday lenders or payroll advance services may seem like a potential solution to someone’s current financial struggles. They can acquire funds to pay their rent or cover unexpected expenses.

Oftentimes, those taking on a payday loan do so with the assumption that they can pay what they owe back very quickly. However, many people fall behind on payday loans and face major expenses or aggressive collection activity. Bankruptcy can be a way for people to escape from the financial trap often created by taking out payday loans.

Why payday loans may lead to financial struggles

Payday lenders offer short-term loans and are therefore exempt from many of the federal financial regulations limiting interest and fees. They can charge huge amounts for the services that they provide. The trade-off for those expenses is the speed with which people obtain the funds they need and the ability to qualify even when someone cannot obtain a personal loan or a new credit card.

Payday lenders are often happy to lend money to individuals because they require agreements to withdraw repayment directly from a checking account. Someone borrows against their next paycheck to cover certain expenses. They may then need to borrow against the paycheck after that to pay back the loan. Otherwise, the company may withdraw a payment and leave their account overdrawn. The amount that they owe may continue to increase because of the fees and interest, creating an ever-increasing financial burden.

How bankruptcy can help

The first way that bankruptcy helps is through an automatic stay. When someone files for bankruptcy, creditors have to cease most collection activity. Payday lenders may not be able to withdraw funds from someone’s checking account or take legal action against them. Even phone calls to try to coerce people into paying their debts usually need to stop.

If the bankruptcy filing is successful, the debts owed to the payday lender, which are usually unsecured debts, are potentially eligible for discharge. The person who borrowed money against their future income can eliminate the repayment obligations that have kept them trapped in personal debt.