You may be surprised to hear that 4 in 10 bankruptcies involve payday loans. For many people, payday loans are not a one-time borrowing option. You may start out thinking I’ll only take out one loan, so I can pay the rent, buy groceries or make a bill payment, but the problem is paying back the payday lender the loan, plus such high interest, leaves you short money again on your next pay. That’s why many people often visit a second payday lender to repay the first. Eventually they end up owing multiple payday loans to multiple payday lenders. We know this because we study bankruptcy and payday loan use every year.
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You can discharge payday loans through bankruptcy
Payday loans are a short-term, unsecured loan available to those with poor credit or who need quick access to cash to pay a bill.
Because they are an unsecured debt, payday loans are dischargeable under the Bankruptcy & Insolvency Act in Canada meaning payday loans can be eliminated when you file bankruptcy.
Most clients we help with payday loans carry other debt as well. They often turn to payday loans as a way of keeping up with their existing debt payment.
Borrowing money through a payday lender when you have significant other debt typically only delays bankruptcy, it does not eliminate the need to do something to deal with the underlying debt.
Filing bankruptcy for payday loans has two big advantages:
- You eliminate payday loan debt and any other unsecured debt you have, and
- because you are no longer making debt payments, you have more of your pay left each pay period for personal living costs. This means you won’t have to rely on payday loans to balance your budget in the future.
If bankruptcy is the right solution for you, it is better to file early. This allows you to begin saving money and start the process of repairing your credit sooner so that eventually you will qualify for better credit options than high cost payday loans.
Filing a consumer proposal for payday loan debt
It is not true that those who use payday loans only have a low income. More than half the people we help with payday loan debt have income over the government set threshold requiring extra payments in their bankruptcy (called surplus income).
A consumer proposal will also eliminate payday loan debt. A consumer proposal may be a viable alternative to deal with payday loans if:
- You have at least $10,000 in total debts including payday loans, credit cards, bill payments and bank loans
- You have an income above the government set surplus income threshold
- You have other assets you wish to keep like equity in your home
A proposal is binding on all payday loan lenders if more than half of your creditors vote in favour of your proposal. If your only debts are payday loans it may be hard to get above 50% approval, so a bankruptcy may be necessary however in our experience most clients carry significant other debt on top of payday loans, so a proposal is a good option to consider.
Will credit counselling deal with payday loans?
In our experience credit counselling cannot eliminate large payday loan debt.
A debt management plan, which is the program offered by credit counselling agencies, is a voluntary program. Payday lenders typically do not agree to participate because they are not willing to waive such high interest on their loans and they are not willing to take payment voluntarily over 4 to 5 years.
A consumer proposal is generally a better option than credit counselling if you have high payday loan debt, along with other debts, since it is binding on every payday lender whether they vote yes or no, if your proposal is approved.
Tips to ensure your payday loan debt is eliminated
By law, once you file a bankruptcy or consumer proposal, any debts owing at the time you file are included in your proceeding and will be eliminated once you are discharged.
You can stop making payments to your creditors once you file, including those to the payday loan company. To ensure you receive the full benefit of this discharge we recommend:
- You change bank accounts before you file. This is particularly important if you have signed a voluntary wage assignment, agreed to an automatic pay withdrawal or provided post-dated cheques with the payday loan company. Changing bank accounts stops the payday lender from taking an automatic withdrawal claiming they were unaware of the bankruptcy. The automatic stay provided by bankruptcy law means that creditors are not legally allowed to collect payment after you file, however, it does take a couple days for them to process the bankruptcy documents they receive.
- Do not listen to requests for payment after you file. We have found that some payday lenders aggressively attempt to persuade clients to pay back the loan for moral reasons (after all, they say, you borrowed the money). However, you filed bankruptcy or made a proposal to eliminate your debt, so you should not agree to send them any funds after you file. You can simply remind them you filed bankruptcy and that it is against bankruptcy law to pay one creditor over other creditors included in your bankruptcy or proposal.
- And as always, complete your bankruptcy duties on time so you can obtain your discharge or certificate of completion as soon as possible.
Getting payday loan help
If, like many of our clients, you are using payday loans to keep up with other debt repayment, this is a cycle that is best broken by filing insolvency with a Licensed Insolvency Trustee.
Bankruptcy will eliminate payday loan debt. Contact us today to talk with an experienced trustee about your payday loan debt relief options.