Many people considering bankruptcy have payday loans. Much like credit cards, people turn to payday loans to finance their daily living expenses. Unfortunately, the high-interest rate and ability to “reloan” week-after-week can trap many people in an endless payday loan cycle with an amount of debt they cannot repay. In these cases, chapter 7 bankruptcy may be an effective solution.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is the most popular form of bankruptcy for individuals. In chapter 7 bankruptcy individuals can eliminate unsecured debts in a matter of months as long as all property can be protected. Forms of debt that are commonly eliminated in chapter 7 bankruptcy include credit cards, medical bills, and payday loans.
Exception to Discharge
Payday loans are generally dischargeable in chapter 7 bankruptcy, but there are exceptions. Large payday loans taken out shortly before a bankruptcy filing may not be dischargeable in chapter 7 bankruptcy. Congress wanted to prevent debtors from “loading up” on consumer debt shortly before a bankruptcy filing. Accordingly, the Bankruptcy Code was amended to except large payday loans taken out shortly before filing bankruptcy from the discharge. However, the patient debtor may simply wait several months after taking out such a loan to file bankruptcy.
How Bankruptcy Attorneys Make Sure Payday Loans Can Be Eliminated
The only payday loans that are a problem in chapter 7 bankruptcy are those taken out shortly before the bankruptcy filing. Accordingly, bankruptcy attorneys avoid these problematic loans by asking their clients whether they’ve taken out any payday loans in the past 70 days. If the client says yes, the cautious bankruptcy attorney will wait at least 71 days from the date of the loan to file the bankruptcy petition. (Of course, if it’s a small payday loan it may be fine to file the bankruptcy petition earlier).