What happens when you can’t repay a payday loan?

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

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

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

If you cannot refund a payday loan, you could settle the debt for less than you owe or declare bankruptcy if your debts are overwhelming. Here’s what you can expect.

Bank withdrawals and collection calls

Payday lenders waste no time when the money you owe is due.

They will immediately withdraw the money from your bank account if you gave them access as part of the loan agreement. If the debits are not made, they may split the charges into smaller chunks in an attempt to extract 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, also incurring charges.

At the same time, lenders will start calling, sending letters of 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 can’t reveal where they’re calling from unless they’re asked or explain your debt situation to anybody.

Free tools to fight debt

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

Jail time? No, but threats are common

Failure to repay a loan is not a criminal offence. In fact, it is illegal for a lender to threaten a borrower with arrest or jail. Nonetheless, some payday lenders have successfully used bad check laws to file criminal complaints against borrowers, with judges mistakenly approving the complaints.

The Consumer Financial Protection Bureau advises anyone facing 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 prefers to collect money directly from you rather than selling your debt to an outside collection agency. Third-party debt collectors may only pay pennies on the dollar to redeem your debt. If you can, start by offering 50% of what you owe to settle the debt.

“Tell the lender: 5 ‘As soon as you start using the word BK, they get very serious, because BK means they get nothing.’

Get any agreement in writing 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 can’t settle, make sure you know how to deal with debt collectors and what practices are illegal. For example, debt collectors cannot call you constantly or make false statements or threats about the amount you owe.

The court summons

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

Today, nearly all consumer lawsuits are for relatively small amounts, says Michael Bovee, president of Consumer Recovery Network, a debt settlement company.

Lenders typically win because consumers don’t show up in court, according to a 2020 analysis by Pew Charitable Trusts. The judge then issues a default judgment and the court can begin to collect the money you owe on behalf of the collection agency.

“Depending on your state’s law, you are subject to real estate liens, bank account levies, and wage garnishments,” Bovee says.

You should never skip 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 often they show up without proof,” Saunders says.

Other options if you can’t repay a payday loan

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

It’s not worth depositing bankruptcy on a little debt, but you might want to consider it if your unsecured debt — including payday loans, credit cards, and medical bills — totals half or more of your income.

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