Payday advance loans and payday lenders have an image problem, and in some states, a legal problem–they aren’t. Legal, that is. Recent federal law caps the interest rates they can charge military personnel. Many states specifically regulate payday lenders; some outlaw them altogether. Others regulate interest rates, or have general regulations regarding taking a post-dated check, and the length of time a check can be held. But in states where such loans are legal, and largely unregulated, (like South Carolina) payday lenders are thriving, and they are an issue in many bankruptcy cases.
For the most part, payday loans aren’t treated any differently in bankruptcy than any other unsecured loan. The fact is that a post-dated check basically takes the place of a promissory note. Many of my clients, however, worry that they will be arrested for passing a bad check, and many payday lenders encourage that belief. But writing a post-dated check to a payday lender is different from passing a bad check at the grocery store. When you go pay for goods or services with a check, you are representing that there are funds in the bank to pay the check. When you go to a payday lender, there is no such representation. In fact, the opposite is true. If you had money in the bank, you’d go to the bank and cash a check. The only reason you are borrowing from the payday lender is that you don’t have money in the bank. (See this post for information about how bankruptcy affects a “real” bad check.)
I have learned to ask prospective clients specifically about payday loans. Many people seem to assume that bankruptcy will not resolve such loans. You should advise your bankruptcy lawyer about those loans, and discuss how to handle them. The other issue to be dealt with is the fact that there is someone out there with access to your bank account, and what we need to do about that. It may be that once you file bankruptcy (or even if you don’t) the lender will never try to negotiate the check. After bankruptcy, they are prohibited from doing so. But it still happens occasionally, and while the law offers remedies, in my opinion this is one case where an ounce of prevention is worth a pound of cure.
Closing your bank account is one answer, but since banks check credit reports to open new accounts, I recommend that a new account be opened before the old one in closed, just in case. If there are only one or two such checks outstanding, it may be worth paying the stop payment fees to make sure that the checks are not cashed. It just depends on whether the cost of opening a new account (new checks, less favorable fees, convenience) exceeds the cost of stop payment fees.
Most states have some type of consumer affairs department that publishes information about payday lenders specifically for that state. For further information online, search for “payday lender brochure.” Even better, consult your friendly neighborhood bankruptcy lawyer, who can help you determine what to do about payday lenders as well as other creditors.
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Last modified: October 22, 2012