Payday loans have a bad reputation, but for those in desperate financial straits, there may be no alternative. Unfortunately, being in desperate financial straits can lead to another inevitability, a bankruptcy filing. While you may know that the vast majority of your debts can be wiped out with a Chapter 7 filing, you may also know that some debts will remain after the bankruptcy. It's in your best interest to get the most debt forgiveness possible with your bankruptcy filing, so read on for a better understanding of how payday loans are treated when filing for a Chapter 7 bankruptcy.
Debts That May Be Discharged With A Chapter 7
Bankruptcy looks at your debt in one of two ways: it's either a secured debt or an unsecured debt. Secured debts have collateral to back them up, so including a secured debt in your bankruptcy could mean the loss of the property used to secure it. For example, a home mortgage is a secured debt, and depending on how much you owe on your loan and the amount of equity in your home, it could be in danger of being seized by the bankruptcy court trustee. Likewise, a car loan is secured by the vehicle itself, with surrender being a real possibility in a bankruptcy.
Unsecured debt, on the other hand, has no collateral to back it up, and is nearly always wiped out with a Chapter 7 bankruptcy filing. Commonly, all credit card and personal loans are considered unsecured and can potentially be forgiven with bankruptcy without surrendering any property.
The Payday Loan
Your payday loan, (unlike a title loan), has no collateral to back it up, and is therefore a fully dischargeable debt with bankruptcy. You may recall signing a form when you received your payday loan where you agreed to pay your loan regardless of any bankruptcy filing. These documents are almost always included in the large stack of required paperwork, but this disclaimer has no standing in bankruptcy court. It would be a huge mistake to leave the payday loan off of your bankruptcy, since it is an unsecured debt and must be included on your petition to have it discharged.
The Creditor's Meeting
You may encounter a representative from the payday loan lender at your creditor's meeting. Don't be alarmed, but be prepared to counter any objections to the loan being included in the bankruptcy filing. These lenders often contend that the loan was taken out for frivolous purposes and that you took it out when you fully intended to file bankruptcy as a means to avoid paying it. As long as you can show that you used the loan proceeds for something vital, like a car repair, home appliance, or medical bill, the debt will likely be included in your filing.
Talk to a bankruptcy attorney, such as those found at O'Connor Mikita & Davidson LLC, for more information about payday loans and bankruptcy.