What happens to payday loans in bankruptcy?

What kind of debt is a payday loan?

The Consumer Financial Protection Bureau (CFPB) describes a payday loan as usually a short-term, high-cost loan that is typically due on your next payday. To repay it, you generally write a post-dated check for the full balance or give the lender permission to debit your bank account.4

That check or debit permission is a way of getting paid. It is not a lien on your property, so a payday loan is normally an unsecured debt: a debt for which the creditor holds no security. If your agreement does give the lender a claim on something you own, such as a vehicle title, the loan is secured and different rules apply.5 4

What happens to the loan in Chapter 7 and in Chapter 13?

A Chapter 7 discharge covers debts that arose before the case was filed, unless the law lists the debt as an exception. Once a debt is discharged, creditors are barred from trying to collect it from you personally.1 6

In Chapter 13 you make plan payments to a trustee, who pays your creditors, usually over three to five years. The plan does not have to pay unsecured debts in full, and a regular plan payment takes the place of the cycle of renewing the loan each payday.2

What about the post-dated check or the bank debit?

This is the part people fear most. Filing triggers the automatic stay, which covers acts to collect a debt that arose before the case, including calls and letters.5 9

The stay does have an exception for the "presentment of a negotiable instrument". Whether that wording lets a lender deposit a post-dated check after you file, and whether the money must then be returned, is a legal question that can depend on your court. Ask a lawyer or your trustee rather than assuming either way.9

• You have the right to stop a company from taking automatic payments from your account, even if you allowed them before. The CFPB's steps are to tell the company you are withdrawing permission, then tell your bank or credit union that the authorization is revoked.10
• Stopping an automatic payment does not cancel the loan. Outside bankruptcy you still owe it.10
• If a creditor willfully violates the stay, an injured individual can recover actual damages, including costs and attorneys' fees.9
• The stay does not stop criminal cases. Whether an unpaid payday loan check can ever be treated as a crime depends on state law, so speak to a lawyer or legal aid office if a lender threatens prosecution.9

Does it matter when you took out the loan?

Yes. A debt is not discharged to the extent the money was obtained by false pretenses, a false representation or actual fraud. A lender may argue that someone who borrowed just before filing never meant to repay.3

There is also a presumption for recent cash advances. For cases filed on or after April 1, 2025, cash advances totaling more than $1,250 under an open end credit plan, taken on or within 70 days before filing, are presumed to be nondischargeable. Whether a particular payday loan counts as open end credit depends on how the loan is set up.3 11

Fraud exceptions are not automatic. The debt is discharged unless the lender asks the bankruptcy court to rule otherwise and the court agrees. If a creditor brings that kind of challenge over a consumer debt and loses, the court must award the debtor costs and a reasonable attorney's fee when the creditor's position was not substantially justified.7 3

Is there anything to try before bankruptcy?

The CFPB suggests contacting the lender and asking for an extended repayment plan, which depends on your state's law or the lender's policy. It also suggests speaking with a credit counselor or a legal aid attorney.12

If you do decide to file, nearly everyone who files as an individual must first get credit counseling from an approved agency within the 180 days before filing.13 14