Crystal Went Bankrupt But Did Not Include All Her Debts. She Left Out Two Payday Loans. Oh Crystal.

“Dear Steve,

Hello…my situation is that I filed bankruptcy earlier this year. At that time, I didn’t include (2) payday loans which I was under the impression were not considered under Chapter 7. These loans are out of Delaware. I thought I could control them afterward the filing.

Since the filing, I was laid off my job, had to move home, had car issues, needed surgery, etc. Fortunately, I started working again about 1 1/2 months ago. To “catch up”, I preceeded to obtain (3) other payday loans and again, thought I could control them. The previous (2) are not in collections and I’m now paying them bi-weekly.

These payday loans are like a tsunami and the (2) weeks come around way too often. Other than these, I’d really be on track. I’m really coming apart at the seams and the fees are out of control. Will a debt consolidation plan be the way or a “payday loan consolidation” be the best way? Will either plan be acceptable even with a Chapter 7 history?

Thank you.


Dear Crystal,

I asked a beloved friend of mine, who is a bankruptcy lawyer for some feedback about your situation as well. You will see that have a slightly different views on the issue but that’s what I love about collaboration, it brings out the best in people. I’ll post the lawyer feedback below, but first, I do have something to say about payday loans.

A payday loan is a short term loan where you pay a fee to get cash in hand now but must repay that money within a short period of time. In certain situations, they can be a benefit. For example, the car breaks down and needs repairs, you need the car to get to work to earn money and you’ll be able to afford to pay for the repair with your next check, in that case a payday loan might be a perfectly good option.

A payday loan is a financial tool, just like a credit card, overdraft or a bank loan. It is not the tool itself that is inherently bad, it is how it is used and abused.

The minute you start taking out new payday loans to cover you when you could not pay back the old ones, is nothing but really bad news. The minute you start doing that, enormously loud warning sirens need to go off in your head.

Readers might say that the multiple payday loans are the sign of an irresponsible lender, and if they are from the same payday lender then I would agree. But in my years of experience I have seen many people get one payday loan here and one there, shooting themselves in the foot without disclosing the previous payday loans to the new lenders.

And some people will feel very critical about the existence of payday lenders at all but there is a large segment of the population that still relies on check cashing and payday lenders for financial services. Many people don’t have bank accounts, can’t get credit from Main Street lenders for emergency situations or distrust banks. in fact, Kinecta Federal Credit Union in California recently purchased the largest check cashing and payday lender chain in the state to be better able to reach that part of the population that relies on these service providers. See “The Good Side of Check Cashing and Payday Loans“)

Crystal, I’ll let my lawyer friends words give you some specific direction about what you can do now and what you should have done when you filed bankruptcy. Let’s let others learn from this painful situation so they don’t have to repeat the same issues.

Dear Crystal:

Before getting to some solutions to your payday loan debts, you should know that payday loans are the most addictive and costly way to borrow money. When you get out of these debts, as explained below, never go to a payday lender again! If you have an emergency need for cash, you are far better off to join and go to a local credit union for a small short-term loan, or even to pawn some property rather than to get a payday loan. The amounts borrowed seem small, but the costs are truly “loan shark” rates– well over 300% interest per year. The payday lenders get around this by saying it’s only meant to be a short term loan, but as you’ve found out, it’s much easier to roll the loan over than pay it off and you end up paying $100 to borrow $100. Below are some solutions to your problems. As soon as you can, please try to start a savings account and “emergency fund” of your own money to fall back on instead of needing an outside source. If you can save even $5 a week, it will build up and then you can be your own lender! There are at least three pieces to the situation you have described.

1. When you file a bankruptcy, you’re supposed to list all of your debts, regardless of whether or not you think they will be affected by the bankruptcy. But you’re in luck, because your personal liability on the loans you owed before the date your bankruptcy was filed was most likely discharged (forgiven) by your bankruptcy. The problem is that these two lenders don’t know that you filed the bankruptcy because they were not listed and did not get notice. This is what bankruptcy lawyers call “the omitted creditor problem.” This can be hard to explain to the lenders since it’s the result of interplay between section 523(a)(3) of the Bankruptcy Code and the Bankruptcy rules and procedures governing “no asset” chapter 7 cases and the filing of claims. Most chapter 7 cases are “no asset,” meaning that you were able to protect or “exempt” all of you property when you filed and there was nothing for your Chapter 7 Trustee to sell for the benefit of your creditors. If your case was a no asset case, then contact the two lenders you owed but did not list, give them proof of your filing and have them agree that their debts are discharged. If you cannot convince them of this, you’ll have to contact your bankruptcy lawyer’s office to get an official explanation letter sent.

2. The payday loans you got after the date you filed your bankruptcy case are not affected by your bankruptcy, but you still may have relief. First, many payday loans made on the Internet are not legal or enforceable under the laws of your state. There are two ways that can happen: The first is that your state may have specific laws against payday lending. The second is that your payday lenders may have failed to comply with other state laws governing creditors. For instance, companies seeking to collect a debt in state A may be required to register with state A’s Department of Insurance or other office. Your bankruptcy lawyer’s office or the state Attorney General’s consumer protection division can help you find out what applies in your state. The state offices are listed at:

3. There’s plenty you can and should do to protect yourself right now. The payday lenders either hold one of your checks or have been given access to your bank account. As soon as possible, close any bank accounts for which you’ve given out information. You can open a new account at the same bank or credit union and you should explain what’s going on to your financial institution. If the debts are legal and valid, then you can ask them to waive the interest going forward and allow you to pay off the debt on your own. Be sure to get everything in writing, including how they will report the debt on your credit reports. And remember that you have rights under federal law not to be harassed.

Hang in there and fight! You can do it!

Well Crystal, that’s an awful long answer for you but I hope you can see that you do have some options. I agree, you should go back and talk to your bankruptcy lawyer and ask for help in addressing those original two payday loans that you didn’t include.

While payday lenders are tougher to work with, they may agree to accept payments through a debt management plan to help repay those debts that you took on after your bankruptcy. Since you recently filed Chapter 7 bankruptcy, that’s not available to you again for a number of years.

The credit counseling group isn’t going to care that you went bankrupt because they are not going to give you a debt consolidation loan, but instead, a possible way out of your debt you are in now with an orderly monthly repayment program.

Big hug, from both of us.


Photo: Steve Rhode

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