If you are struggling to meet your monthly obligations such as paying bills or buying groceries, you can apply for a payday loan to ease your financial burden.
A payday loan can be known as a variety of other things, such as, a cash advance, salary advance, paycheck advance, check advance and so on. These loans are easy to apply for, do not require any form of collateral and any adult with steady employment and with an active checking account can get approved for them.
However, times can be difficult and you may end up unable to pay the payday loan. In this scenario, the loan will continue renewing on its due date and at the same time accruing interest and other charges such as late payment fees.
When unable to pay their debts, some people opt to file for bankruptcy. Should you file for bankruptcy, what happens to the payday loan debt?
Payday Loans and Bankruptcy
Payday loans are given without collateral and are therefore unsecured debts. Generally, any unsecured debt is discharged when you file for bankruptcy. Let’s look at what’s bankruptcy and how bankruptcy relates to payday loans.
In a bankruptcy, debtors can discharge any debts without repayments. All debts that are not secured, such as payday loans, are dischargeable. You should indicate the payday loan as an unsecured loan on your bankruptcy petition. All unsecured debts are dischargeable under bankruptcy since they are not considered to be priority debts.
Bankruptcy Related to Payday Loans
Here, you will be required to pay your debts through structured payments. In this option, any payday loans will have to be paid over time according to the payment structure recommended by the court. If you are unable to complete paying back the loan, you can take advantage of a hardship provision to discharge part of it.
Know Your Rights
Payday loans offer quick relief when you are in financial hardship. However, before you apply for the loan, you should know your rights. For example, just like any other unsecured personal loan, a payday loan can be discharged in a bankruptcy proceeding.
Some lenders may have a disclaimer in their terms indicating that their loans are not dischargeable. This information is not true and is usually a scare tactic to make borrowers pay back.
Is Bankruptcy the Way out for a Payday loan?
If you have an outstanding payday loan, bankruptcy isn’t your best option. Unlike loans from banks and other credit institutions, payday loans are usually smaller. For example, most lenders offer payday loans of just up to $1,500. This is a small amount that you can easily pay back if you work on your finances.
The best way to manage your payday loan debt is to drastically cut back on expenses. Check your month spending and determine how much you can save by eliminating some luxury spending. For example, you can choose to cut off or reduce spending on cable TV, clothing, entertainment and even junk food. The small savings you accrue from the spending you eliminate can be channeled towards paying back the payday loan.
Another route you can consider is getting a part time job or working overtime to increase your income. Doing a part time job for a couple of hours every day can leave you with significant additional income at the end of the month. Alternatively, if you cannot do any job, sell something. Sites like eBay are great for selling personal items. If you wish, you can also hold a garage sale in your neighborhood.
You can also try to pay off the debt using a credit card. While you may not be able to qualify for a low-interest credit card, you can pay off the debt with a high interest credit card which takes longer to pay back. This is a better option than leaving your payday loan to continue accruing interest every month.
Finally, if you cannot get approved for a credit card, you can request someone you know that has a good credit score to co-sign a credit card account. Before you request for a co-signer, make sure you have a solid plan on how you will pay back the balance on the card.
Filing for bankruptcy will lower your credit score. Apart from this, there is a lengthy waiting period before you will be allowed to file again (should you need to). Bankruptcy should be your last resort when unable to pay your loan.