Can I Get A Payday Loan To Pay For My Bankruptcy?

One of the most frequent questions Clients ask is: "Can I Get A Payday Loan To Pay For My Bankruptcy?" The short answer is "yes," but it is much more complex than that.  

To begin with, the Bankruptcy Code prohibits Bankruptcy Attorneys from advising their Clients to borrow money before they file a Bankruptcy Case.  Although I think this provision of the Bankruptcy Code is unconstitutional, until the Courts overturn that provision of the Bankruptcy Code we are stuck with it and it must be considered by any Bankruptcy Lawyer when answering this question.

At the same time, every Bankruptcy Attorney is charged with, and has sworn an oath to, zealously representing their Clients. So, while I must first advise my Clients I am not permitted to encourage them to borrow money before they file a Bankruptcy Petition, I must also advise them of the consequences, good and bad, if they choose to borrow money before filing their Bankruptcy Case. 

The good news is there is no law law which says you can't borrow money before seeking Bankruptcy Protection. Furthermore, even if you incur debts just before filing Bankruptcy, those debts will be discharged unless the creditor, who loaned you money, files what is called an Adversary Proceeding. An Adversary Proceeding is a separate lawsuit, which a Creditor files in your Bankruptcy Case, asking the Court to make certain debts, including but not limited to those incurred shortly before you filed Bankruptcy, non-dischargeable. Once the Court rules that some or all of your debt is non-dischargeable, you will be responsible for paying that debt after your case is over. 

The cost of filing an Adversary Proceeding is expensive as the creditor must hire an attorney, pay Court Costs and spend the time and effort prosecuting the case.  Moreover, the Creditor must file the Adversary Proceeding within 60 days after the date of the First Meeting of Creditors or the debts will be discharged. Even if a creditor files an Adversary Proceeding, there is no guaranty they will prevail. For these reasons, Adversary Proceedings, filed to make recently incurred debt non-dischargeable, are very rare. From a practical standpoint, the costs of bringing an Adversary Proceeding, the time limits on doing so as well as the uncertainty of success, means Adversary Proceedings usually only arise when the Debtors conduct is egregious and large amounts of debt were incurred in close proximity in time to the Bankruptcy Filing. 

There are, nevertheless, many potential hazards if you choose to borrow money, whether through new loans or by incurring charges on existing credit cards or credit facilities, and file bankruptcy within a short period of time thereafter. First, the Bankruptcy Code provides a presumption of fraud if a Debtor makes purchases for luxury goods or services on credit aggregating more than $675.00 within 90 days of filing Bankruptcy or takes cash advances aggregating more than $950.00 within 70 days before filing Bankruptcy. Furthermore, a creditor can still pursue an Adversary Proceeding to make older charges non-dischargeable but the presumption of fraud, which arises when the charges are made within the time frames set-forth above, will not arise. So, if the charges were made within the periods of time when the presumption of fraud arises, the creditor will simply have to demonstrate the timing of the charges and the burden of proof will shift to the Debtor to rebut the presumption and show there was no fraudulent intent when the charges were made. If the Debtor fails to rebut the presumption of fraud, the Court will deem those charges non-dischargeable and the Debtor will be responsible for paying them after their Bankruptcy Case is over. If, on the other hand, the charges are older and the presumption of fraud doesn't arise, the creditor will have the burden of proving the charges were made with actual fraudulent intent before they will become non-dischargeable. Second, most creditors ask if you intend to file Bankruptcy when you apply for credit. If you lie on the application, regarding this or any other question that is material to the loan application, you are committing actual fraud which is grounds for making the debt non-dischargeable regardless of the nature of the loan or type of charges.

The most common lenders, used by Clients to pay for their Bankruptcy Cases, are Payday Loan Lenders.  Fortunately, Clients can usually only borrow smaller amounts of money from Payday Loan Lenders. Once a Client gets the Payday Loan and uses it to pay for their Bankruptcy, the Payday Loan Lender must file an Adversary Proceeding, as outlined above, to get a determination making the Payday Loan non-dischargeable. The filing of an Adversary Proceeding to make such a small loan non-dischargeable is almost always cost-prohibitive. In fact, the cost of prosecuting the Adversary Proceeding is almost always significantly higher than the amount of the Payday Loan. As evidence of this, I can't recall the last time a Payday Loan Lender filed an Adversary Proceeding to make a Payday Loan non-dischargeable.  

Even if the amount of the Payday Loan was significantly higher than usual, the Payday Loan Lender is NOT guaranteed to win the Adversary Proceeding.  For the most part, people who borrow money from Payday Loan Lenders have very bad credit which puts the Payday Loan Lender on notice the borrower is a likely candidate for Bankruptcy. Furthermore, in any Adversary Proceeding filed by a Payday Loan Lender, I would assert as a defense, if not a Counterclaim, the fact the Payday Loan industry is, by definition, in the business of Predatory Lending.  To maintain a case for Fraud, the Payday Loan Lender must have clean hands (a legal term meaning they are acting in good faith and haven't themselves engage in nefarious behavior). That is pretty hard to do when you are loaning money to people who are predominately poor with no credit and make the loan on terms that flaunt Usury Laws. For these reasons, in my experience it is extremely rare for a Payday Loan Lender to commence an Adversary Proceeding to collect a Payday Loan even if the Payday Loan was made very close in time before the filing of the Clients' Bankruptcy Petition. For better or worse, this means most of the time my Clients get to discharge the Payday Loan and the Payday Loan Lender paid, in whole or in part, for my Clients' Bankruptcy Case. 

Again, I am not encouraging anyone to borrow money from a Payday Loan Lender or any other lender before filing a Bankruptcy Case. If, however, you still decide to do so, there are some additional considerations of which you should be aware. Many Payday Loan Lenders make the borrower give them a check for the amount of the Payday Loan. As most people know, writing a "bad" check is a crime.  However, as long as the check is post-dated (the date written on the check is later than the date on which the check is written), it is very difficult to turn the writing of the check into a criminal case. It is only illegal if you write a check knowing there is insufficient money in your bank account to cover it when it is written.  With a post-dated check, the check writer isn't writing a "bad" check but merely making a promise to pay at some date in the future. In essence, this is merely a promise to pay, the same as given in a promissory note, involving no criminal activity and for which only a civil remedy is available (i.e. they can sue you for the money your promised to pay but you can't be criminally prosecuted for it).  It is, therefore, very important that the checks are post-dated to a future date.

In addition, many Payday Loan Lenders will cash the check even if you tell them not to at a later date.  To avoid payment of the check by your bank, you should put a stop payment on the check and then notify the Payday Loan Lender not to cash the check. If you fail to stop payment on the check, or it is otherwise honored by your bank, it could overdraw your account. In this situation, you would simply list the bank as a creditor on your Bankruptcy Schedules and discharge the overdraft.  In addition, some Payday Lenders even cash the check after you file your Bankruptcy Petition in violation of the Bankruptcy Automatic Stay. When this happens, getting your money back can be very difficult. In such circumstances, the Debtor is placed in the same difficult position the Payday Loan Lender finds itself when trying to make a Payday Loan non-dischargeable. The Client must file a Motion for Sanctions for the Payday Loan Lender's violation of the Automatic Stay while simultaneously defending their own actions in borrowing money shortly before filing Bankruptcy.

Wishing you a Fresh Start and an Auspicious New Beginning,

Greg Wetherall

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