What happens when you can’t pay off a payday loan?

A default on a payday loan can result in bank overdraft charges, collection calls, damage to your credit scores, a day in court, and garnishment of your paycheck.

Don’t think that it can’t happen because you only borrowed $ 300.

“If you have a valid, binding legal agreement to pay off that debt, and you’re in a state where they can sue you and garnish your paycheck, you’re playing a chicken game that you’re going to lose. Said Bruce McClary, spokesperson for the National Foundation for Credit Counseling.

If you cannot refund a payday loan, you could pay off debt for less than you owe, or file for bankruptcy if your debts are overwhelming. Here is what you can expect.

Bank withdrawals and collection calls

Payday lenders don’t waste time when the money you owe is owed.

They will immediately withdraw the money from your bank account if you have given them access to it under the loan agreement. If the debits are not made, they can split the charges into smaller pieces for the purpose of extracting the money that is in your account.

Each unsuccessful attempt may trigger bank charges against you. Successful attempts could drain your bank account and bounce other transactions, resulting in fees as well.

At the same time, lenders will start calling, sending letters from attorneys, and contacting relatives or friends that you used as references when you took out the loan. By federal law, lenders can only ask for help locating you – they cannot reveal where they are calling from unless asked or explained to someone about your debt situation. it would be.

Free tools to fight debt

NerdWallet helps you stay on top of upcoming payments and understand your debt allocation.

Jail time? No, but threats are common

Failure to repay a loan is not a criminal offense. In fact, it is illegal for a lender to threaten a borrower with arrest or jail. Nonetheless, some payday lenders have been successful in using bad check laws to file criminal complaints against borrowers, with judges falsely approving the complaints.

The Consumer Financial Protection Bureau advises anyone threatened with arrest for non-payment to contact their state attorney general’s office. You should never ignore a court order, even if the criminal complaint was filed in error.

A chance to negotiate

A lender would rather collect money directly from you than sell your debt to an outside collection agency. Third-party debt collectors may only pay pennies on the dollar to buy your debt. If you can, start by offering 50% of what you owe to pay off the debt.

“Tell the lender, ‘Look, I just can’t pay you and I’m considering bankruptcy,’ says John Ulzheimer, a credit expert who has worked for the credit rating company FICO and the Equifax credit bureau. “As soon as you start using the word BK they get really serious because BK means they get nothing.”

Get a written agreement and make sure the document says your balance will be reduced to zero. In official terms, you want the debt to be “exhausted”.

If you are unable to settle, make sure you know how to deal with debt collectors and what practices are illegal. For example, debt collectors can’t call you over and over again or make false statements or threats about how much you owe.

Summons to court

If you think collection agencies don’t bother to sue for small amounts, think again.

Almost all of the lawsuits against consumers today are for relatively small amounts, says Michael Bovee, president of Consumer Recovery Network, a debt settlement company.

Lenders typically win because consumers do not appear in court, according to a 2020 analysis by Pew Charitable Trusts. The judge then makes a default judgment and the court can start collecting the money you owe on behalf of the collection agency.

“Under the law of your state, you are exposed to property liens, bank account charges and wage garnishment,” Bovee said.

You should never ignore a lawsuit, says Lauren Saunders, associate director of the National Consumer Law Center.

“Go to court and ask them for proof that you owe them money, because they often show up without proof,” says Saunders.

Other options if you can’t pay a payday loan

You shouldn’t prioritize paying the payday lender over putting food on the table or paying the rent, says Saunders.

No need to apply bankruptcy on top of a small debt, but you might want to consider it if your unsecured debt – including payday loans, credit cards, and medical bills – adds up to half or more of your income.

Don’t delay and hope the debt will magically disappear – it doesn’t. “Time never makes debt go away,” says Ulzheimer. “Bankruptcy does it.”


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