Outstanding Payday Loans and Bankruptcy

01 Dec Outstanding Payday Loans and Bankruptcy

Post-dated payday loan checks can be cashed even after a bankruptcy is filed, according to a federal appellate panel. They may not be able to keep the money, however.

Most bankruptcy filings trigger an automatic stay which stops collection of debt by creditors. One exception to this stay is for “negotiating” — cashing — a check. An Ohio bankruptcy court concluded this did not protect a payday lender that was collecting money on a high interest debt, after receiving notice of the case, and awarded damages and attorney fees. The court reasoned that although the check could be cashed, the money continued to be part of the bankruptcy estate and had to be returned.

The Sixth Circuit Bankruptcy Appellate Panel reversed and concluded that the money lost its status as property of the estate when it was transferred. The debtor or trustee in the case could try to recover it as an unauthorized post-petition transfer but they were not entitled to immediate return of the money nor to damages. (The opinion is in In re Meadows.)

Why should this case matter? First, it tells you to be careful about the outstanding checks. If you are filing bankruptcy, be aware who is holding a “live” check that might be passed after the case is filed. If you are counting on the money in the bank for other needs — like rent or your mortgage — then don’t. It could get yanked away. You might need to accept having some checks bounce, either the payday loan or other checks you wrote, in order to start getting your house back in order. How to do that will depend on your state laws and circumstances, so it’s critical to discuss it with your lawyer.

Second, practitioners when putting a case together, particularly Chapter 13s that depend on reliable cash flow after filing, should watch for post-dated checks. And be prepared to move promptly to get the funds back. It is possible some courts will conclude only a trustee can pursue recovery of some post-petition transfers so it may be necessary to seek the trustee’s help or obtain permission from the court (possibly through a plan provision) to allow the debtor to act on behalf of the estate.

Debtor counsel should pursue recovery of these transfers. True, the amounts are usually small, only a few hundred dollars. But they can be large for debtors. They can mean the difference between starting a case on an even keel and starting it running behind on something important and playing catch-up. And, just as important, payday lenders already have the deck stacked in their favor in most ways.

By using post-dated checks, they get to jump out of the proper distribution system dictated by federal law. They get paid before or instead of other unsecured creditors. That in turn cascades into other fees and costs the consumer runs up, often ultimately costing as much as the original loan. Making them return the money is not only right but fair.

If they’re foolish enough to fight and run up their legal fees in the process, well, some of us won’t shed a tear.

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2019 I served on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. Our Report recommended numerous changes to improve bankruptcy law to make it serve everyone in the process more effectively. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website: STLBankruptcy.com

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