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Outstanding Payday Loans During Bankruptcy

September 9, 2009

Payday loan companies prey on individuals experiencing financial difficulties. These lenders offer a short-term loan of a few hundred dollars that will be repaid on the borrower’s next payday. To obtain the loan the borrower usually writes the lender a post-dated check. Often the payday loan lender will require a certification that the borrower is not contemplating bankruptcy, and, sometimes, that the borrower will not file bankruptcy.

While the borrower may initially intend to use payday loans to fix a short-term financial problem, often payday loans start an endless cycle of debt. Payday loan companies charge high interest rates over short periods and rely on the borrower’s inability to satisfy the loan, and is consequently forced to renew it. Unfortunately, this cycle of debt often leads the borrower to file bankruptcy.

Many individuals worry that they will face criminal trouble for passing a bad check when they cannot cover their post-dated check. With a few narrow exceptions, being unable to pay the payday loan check is not a criminal act.  However, your post-dated check may still be presented for payment, resulting in significant bank fees. In some cases (notably in the 6th and 8th Circuit Court of Appeals) courts have stated that the presentment of the post-dated check does not violate the automatic stay provisions of the bankruptcy code. However, these courts have said that the funds collected by the payday loan company may be an “avoidable transfer.”

While an agreement to not file bankruptcy is generally considered void because it violates public policy, a representation to the payday loan lender that the borrower is not contemplating bankruptcy is a serious matter. A borrower that takes a payday loan with the intention of discharging it through bankruptcy, and with no intention on repaying the loan, may have committed fraud and even a criminal act!

Proper handling of an outstanding payday loan is an important consideration before filing bankruptcy. Most payday loans are discharged through bankruptcy without problem; however, payday loan companies are becoming increasingly more knowledgeable and aggressive towards debtors in bankruptcy. If you have an outstanding payday loan, consult with your attorney and protect your legal rights.




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