Bankruptcy Doesn’t Stop Payday Loan Providers from Collecting
Inside Subprime: Feb 7, 2019
By Lindsay Frankel
When borrowers can’t pay back their debts, filing for bankruptcy is intended to create time and space for financial planning. Payments to creditors are frozen by the court until the borrower can come up with enough money to pay back at least a portion of the debt. But when payday loans are involved, borrowers don’t always get relief, according to the Daily Press.
Leon M. Hatcher, a retiree in Richmond, Virginia, filed for bankruptcy when he became trapped in debt. Yet even after the freeze, a payday loan firm withdrew $666.74 from Hatcher’s bank account to put towards a $1,400 loan he took out months earlier, according to court records. The payday loan had an interest rate of 273.75 percent, and his balance increased to $1,800 over a period of three months. The unexpected withdrawal also caused Hatcher to incur a bounced check fee, since he didn’t have enough money left in his account to make payment on a utility bill.
But the payday loan firm kept withdrawing money from Hatcher. It took dozens of communication exchanges between Hatcher’s lawyers and the company before the payday loan company finally stopped debiting Hatcher’s account.
The same thing happened to Franklin and Shelby Clark after they filed for bankruptcy. The loan firm repeatedly withdrew funds from their accounts, despite the court’s protection. This time, calls from the Clarks’ lawyers didn’t stop the problem – it took a formal complaint, which was later settled out of court, to finally halt the payday lender’s collections.
In a similar case involving another payday loan firm, the lender called Christiansburg couple Stacy and Wanda Griffin and threatened to sue them if they did not pay back their small-dollar loan, even after confirming with their lawyer that the couple had filed for bankruptcy. According to the Consumer Financial Protection Bureau, debt collectors are required to contact the debtor’s attorney instead of the borrower, so long as the lender is aware that the borrower is being represented. Yet payday lenders continue to engage in disreputable – and sometimes illegal – collection practices.
If you’re considering filing for bankruptcy and you have an outstanding payday loan, there are certain issues you should be aware of. First, if you’ve taken out a payday loan or cash advance within 70-90 days before filing, the lender may try to prove fraudulent intent, which can have serious consequences. But that’s unlikely if you’ve been a repeated loan borrower, and borrowers taking out five or more loans in a year account for the vast majority (91 percent) of payday loans.
Also, if you’ve written a post-dated check in exchange for receiving a payday loan, the lender may cash the check even after you’ve filed for bankruptcy. However, if you let the lender know about your bankruptcy filing, then the court could deem the collection an automatic stay violation. In this case, the money could be returned to the bankruptcy trustee administering your case.
Payday loans, like bankruptcy, should be considered a last resort. The high interest rates trap borrowers in a cycle of debt that can be impossible to overcome. One study even found that payday loan borrowers are more likely to file for bankruptcy than non-borrowers in a similar financial situation. To avoid the aggressive collection practices associated with payday loans, consider all other alternatives before visiting a payday lender.
For more information on payday loans, scams, and cash advances and check out our city and state financial guides including Florida, Indiana, Illinois, Kansas, Kentucky, Missouri, Ohio, Texas and more.