Yes, you can file bankruptcy on payday loans in the United States. Payday loans, despite being short term and often unsecured, are considered personal debts, and like most unsecured debts, they can be discharged through bankruptcy. This offers a critical lifeline for individuals overwhelmed by high interest lending cycles, especially those struggling to stay afloat financially.
Payday loans are typically marketed as quick fixes for emergency expenses. However, they come with high interest rates and short repayment terms, often due within two weeks. For many borrowers, these terms are unmanageable.
The Consumer Financial Protection Bureau (CFPB) found that nearly 80% of payday loans are rolled over or followed by another loan within two weeks, trapping borrowers in a dangerous cycle of debt. This pattern leads many people to consider legal debt relief options, including bankruptcy.
What Are the Main Types of Bankruptcy That Include Payday Loans?
There are two primary types of personal bankruptcy available in the US: Chapter 7 and Chapter 13. Each can include payday loans in the dischargeable debt category, but they operate differently.
Chapter 7 bankruptcy, also called liquidation bankruptcy, allows individuals to discharge most unsecured debts including credit cards, medical bills and payday loans typically within three to six months. To qualify for Chapter 7, you must pass the Means Test, which compares your income to the median income in your state. If you qualify, the court may liquidate some of your non-exempt assets to pay off creditors, though many filers keep most, if not all, of their belongings.
Chapter 13 bankruptcy, on the other hand, sets up a repayment plan that spans three to five years. It is often chosen by people with regular income who do not qualify for Chapter 7 or who want to protect assets like a home from foreclosure. In this structure, payday loans are consolidated with other debts, and you repay a portion based on your ability to pay. Any remaining qualifying debt at the end of the plan is typically discharged.
Can Payday Loans Be Eliminated Through Bankruptcy?
From a legal standpoint, payday loans are unsecured debts which means that there is no collateral attached, such as a car or house. This puts them in the same category as credit card debt. As long as the payday loan is not fraudulently obtained, it is eligible for discharge in bankruptcy.
Fraud can become an issue if, for example, someone took out a payday loan with no intention of repaying it, knowing they were about to file for bankruptcy. If a lender can prove this, a court may declare the loan non-dischargeable. However, this is rare and requires significant evidence on the part of the lender.
Filing for bankruptcy is a federally protected legal right, and once you file, something called the automatic stay takes effect. This stops all collection efforts, including phone calls, wage garnishments and legal proceedings, giving you breathing room while your case is processed.
How Does Bankruptcy Affect Your Credit Report?
Filing for bankruptcy, especially a Chapter 7, will appear on your credit report for up to 10 years, while Chapter 13 remains for 7 years. This can make it more difficult to qualify for new credit, mortgages or even rental applications in the short term.
However, continuing to rely on payday loans also damages your credit profile and financial health over time. Multiple short term loans and overdraft penalties can lead to missed payments, lower credit scores and a prolonged financial spiral. For many people, the long term benefits of wiping out debt through bankruptcy outweigh the temporary credit hit, especially if they use the clean slate to rebuild responsibly.
It is also important to note that not all lenders report payday loans to credit bureaus. However if the debt is sold to a collection agency, which often happens, the agency will typically report the delinquency. This impacts your credit score just like any other unpaid bill. Bankruptcy, while serious, can actually prevent further deterioration of your credit.
When Should You Consider Filing for Bankruptcy Over Payday Loans?
Deciding whether to file for bankruptcy because of payday loans depends on the broader picture of your finances. If payday loans are just one piece of a larger debt puzzle along with medical bills, credit card debt or repossessions, bankruptcy may offer comprehensive relief.
According to the American Bankruptcy Institute, over 60% of bankruptcy filers cite medical expenses, job loss or unexpected financial hardship as primary reasons for filing. Payday loans often appear in these cases as a last-ditch effort to manage urgent needs. When these efforts fail, bankruptcy becomes not just an option, but sometimes the only viable one.
It is also worth consulting with a qualified bankruptcy attorney. Many offer free consultations and can help you evaluate whether bankruptcy is the right step. They can also guide you through the filing process, help you understand exemptions in your state and ensure your payday loans are correctly listed.
Are There Alternatives to Bankruptcy for Payday Loan Debt?
If bankruptcy feels too drastic, consider alternatives. Debt management plans (DMPs) offered through non-profit credit counseling agencies can help consolidate payday loans and other debts into a single monthly payment, often with reduced interest rates. Debt settlement is another option, though it can also damage your credit and does not always guarantee success.
The Bottom Line
It is certainly possible to file bankruptcy on payday loans. These loans, like other forms of unsecured debt, are dischargeable under both Chapter 7 and Chapter 13 bankruptcy.
While filing for bankruptcy is a serious decision with lasting impacts on your credit report, it may be the only way to break free from a crippling cycle of debt. By understanding your legal rights and evaluating your full financial picture, you can make an informed decision about whether bankruptcy is the right step toward a more stable future.
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Justine is a full-time writer with lots of expertise and a wealth of experience in the financial world. In particular, she specializes in household income and consumer finance across the United States. Follow her articles for useful advice and top tips, guides on how to save money and lots more.