Pay Day Loan Collections

I am having financial problems and I asked the payday loan company not to call my job. What should I do?

I have several payday loans I cannot repay right now. The payday loan collector threatened me with arrest, and said they will call my job and have me fired. They also threaten civil legal action. What can I do?

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Highlights


  • Avoid pay day loans if at all possible.
  • Make every effort to repay a pay day loan as agreed, or you will face severe financial penalties.
  • Knowing your rights under the FDCPA to protect yourself from debt collector harassment.

Handling a payday loan is difficult. The biggest challenge is to take charge of the situation and create a solid repayment game-plan, especially since the payday loan cycle is so expensive. My answer discusses what a payday loan is and why you should avoid them, your rights as a consumer, tactics a payday lender will use in collections, and strategies for freeing yourself from the payday loan trap.

What is a Payday Loan?

These small loans, also called “cash advance loans,” “check advance loans,” or “deferred deposit check loans,” are a frequent pitfall for consumers. A fee anywhere from $15-$30 per $100 borrowed is charged for an average loan of $300. The borrower often gives the lender a post-dated check, which the lender later uses to electronically transfer a payment or the entire balance of the loan from the borrowers account.

An especially insidious practice is to withdraw a partial payment from the account as a “customer service.” This partial payment becomes a perpetual installment that continues despite the borrowers’ best efforts to halt it.

With rates so high and the term of the loan so short there is no wonder that a very high percentage of these loans are rolled over by the borrower again and again so that the accumulated fees equal an effective annualized interest rate of 400% to 1,460% APR depending on the number of times the principal is rolled.

One slightly light-hearted fact regarding payday loans: Wikipedia.org, the leading online encyclopedia, list payday lending under Loan Shark, stating that “if the defining characteristics of loan sharking are high interest rates and a credit product that traps debtors, then the label certainly applies."

The Federal Trade Commission offers a great Web page regarding payday loan alternatives.

Payday Loans and Consumer Rights

A payday lender may attempt to collect the balance itself. If the borrower defaults, the payday lender may sell the debt to a collection agent, which we discuss later.

If the payday lender (or collection agency, for that matter) cannot convince you to pay through standard collection tactics, such as phone calls and letters, the payday lender may decide to file a lawsuit against you to obtain a judgment for the balance of the debt. If the lender sues and obtains a judgment against you, it can then take steps to enforce the judgment as allowed by your state law in civil court. The most common methods of enforcing a judgment are wage garnishment, bank account levies, and property liens.

Note that not on this list of enforcement actions are calling your employer, contacting your neighbors, or getting a warrant for your arrest. Failing to repay a debt is a civil matter and not criminal. A common threat many payday lenders use is arrest for check fraud: This is a groundless threat unless the payday lender has evidence to prove the borrower never intended to repay the payday loan. Proving that is very difficult. Remember, no one has been arrested or imprisoned for debt in the United States since the Civil War.

To learn more about debt collection laws in your state, see the Bills.com debt collection laws page.

If the payday loan company sells an account to a collection agent, the borrower may be obligated to pay the balance to the collection agent.

A federal law called the Fair Debt Collection Practices Act (FDCPA) states that a third party collection agent must stop calling you if you notify them in writing to do so. Several states, such as California, New York, and Texas, extend many of the regulations in the FDCPA to cover original creditors as well. See Advice If You’re Being Harassed by a Collection Agent to learn what actions you can take if you believe a collection agent is violating the FDCPA.

If the payday loan company sells the account to a collection agent, the debtor can stop the telephone calls by sending a cease communication demand letter, commonly called a cease and desist notice, to the collection agent. (See the Bills.com debt self-help center for sample cease-and-desist letters.)

How Can I Handle Payday Loan Collections?

Many payday loan collectors use intimidation to strike fear into borrowers. Just because a person is in debt does not mean that person loses their rights as a consumer.

As mentioned above, many payday lenders require borrowers to provide their checking account numbers so that payments can be withdrawn from the borrowers’ accounts automatically using the Automated Clearing House (ACH). In instances where the borrower accounts lack sufficient funds, the payday lender will continue to attempt withdrawals. This may create overdraft charges for the borrower, and if done often enough, the bank may close the borrower’s account.

One common tactic to deal with payday lenders who repeatedly withdraw funds from a borrower’s account is for the borrower to close the account and reopen another at the same bank. This is effective unless the bank links all transactions from the old account to the new one. If that happens, when the payday lender makes a withdrawal, the bank simply reaches into the new account to remove the funds. The lesson here is to make sure the bank does not allow electronic withdrawals from the old account to be transferred automatically to the new account.

Once the account is closed, the borrower can create and negotiate a repayment plan with the lender. There are eight states whose payday loan regulating statutes requires lenders to set up an installment repayment plan if an account reaches the maximum number of rollovers allowed by law and the debtor declares that he/she is unable to pay the balance due.

Learn more about the payday loan laws in your state, including each state's attempts to regulate them. You state may require a repayment plan. If your state does, and your lender will not accept a payment plan, call your state’s regulator of payday loans, usually an assistant Attorney General, and complain. You should get the results you want after the Attorney General’s office becomes involved.

If you are not in one of those states, consider simply making payments to the lender anyway to pay down the balance of the loan over time. In most states, the rollover limit will soon be reached, and the interest rate the lender can charge will be capped by state law. If the lender will not accept your payments, simply put what you can afford aside until you have enough money to either payoff the loan or to offer a settlement.

Read the regulations in your state to find the best strategy for your situation. To learn more about tactics and strategies for dealing with creditors, read the Bills.com article Debt Negotiation and Settlement Advice.

Bills.com also offers more information on the Payday Loan Information page, and has answered reader questions about payday loans in California, Florida, Illinois, Massachusetts, Missouri, New York, Texas, and Virginia.

If you do not repay a payday loan, the payday loan company has several legal remedies, including wage garnishment, levy, and lien. See the Bills.com resource Collections Advice to learn more about the rights of creditors and debtors.

See also the free Bills.com Financial Planning and Budget Guide, which can help you manage your finances and help you learn about budgeting and prudent financial management.

I hope this information helps you Find. Learn. Save.

Best,

Bill

Bills.com

261 Comments

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  • JF
    Apr, 2013
    Julie
    I live in Washington state. I received a phone call this morning from a gentlemen claiming to be from a collections company. "Richard" told me that he was collecting a debt from a payday company and the "good news" was that his supervisor was allowing him to take a debt of $485 down to $189 if I paid today. When I inquired about when the debt was incurred, he said 12/05. If I didn't pay it he would take it to court for wage garnishment on the 11th of this month. I asked about the statute of limitations and he said it was 10 years. Told him it wasn't me. Can they really do the garnishment? Thank you for your help, Julie
    0 Votes

    • BA
      Apr, 2013
      Bill
      Three assignments for you:
      1. The next time the collection agent calls, gather contact information about the collection agent, including his or her name, the employer's name and address, and whatever information he or she has about the debt, and then validate the debt. Follow the instructions on the hyperlink I just mentioned to learn how.
      2. Learn more about what power your state statute of limitations has and does not have. In most states, the expiration of a statute of limitations will not prevent a plaintiff from filing a lawsuit.
      3. You mentioned the collection agent said he planned to "take you to court" on the 11th of this month. Ask him which court he filed the lawsuit in. If the action has been filed, double-check with the court to make sure what you're being told isn't a line of baloney. If the collection agent says he has not filed the action, then you need not worry about filing an answer to the lawsuit.

      You mentioned you reside in Washington. The Washington statute of limitations for a written contract, which is what I assume applies to payday loans in Washington, is 6 years. The statute of limitations for judgments is 10 years. Therefore, the collection agent either misinformed you about Washington law, or the collection agent has a judgment against you. Ask him if he has a judgment. If so, then ask him which court awarded the judgment, the date, and so on, and consult with a Washington lawyer immediately about filing a motion to quash the judgment.

      Why a motion a vacate the judgment? You seem surprised by the collection agent's call. If you were a defendant in a lawsuit, you would have received a written notice of the lawsuit in the form of a summons. If the plaintiff (the party filing a civil suit) followed your state's civil procedure laws correctly, you would have received notice of the action. Failure to give a defendant notice of a lawsuit is grounds for throwing-out a judgment.

      0 Votes

  • BD
    Mar, 2013
    Bianca
    I live in Ohio and I have four different payday loans they are in default. I am in contact with them and I am trying to pay it off offering them $50 a month but they do not want to accept it. I cannot afford to pay more. What should I do? I was told I can apply for bankruptcy and include these payday loans but I really prefer not to. Please can anyone give me some advice?
    0 Votes

  • DD
    Jan, 2013
    deanna
    I got a payday loan about a year ago, and the account was closed. I was not really thinking about the loan when I closed the account. It was not my intention to deceive anyone. I was getting a divorce and leaving an abusive marriage and just wanted to get out of town. Can they charge me with theft-by-deception as they claim?
    0 Votes

    • BA
      Jan, 2013
      Bill
      Let us assume for a moment the payday lender is highly motivated to see you charged with a crime. The steps would be as follows:
      1. The lender would file a complaint with the local police or the district attorney
      2. If the police department or DA think the case is worth their time, either will assign the case to an investigator.
      3. The police or DA investigator will bring the evidence it finds to the DA
      4. The DA may or may not decide to file charges in a local state court based on the evidence.

      The details for each jurisdiction vary, but the general procedure is the same. A DA or state attorney general brings charges against a criminal defendant. A creditor, such as a payday lender, does not bring criminal charges against a consumer.

      A creditor, such as a payday lender, may bring a civil complaint against a consumer. The most likely legal theory it would use in a civil case would not be theft, but breach of contract.

      0 Votes

  • AG
    Oct, 2012
    Ashley
    Hello, I didn't see any information regarding this, I might have missed it...but a relative used my Social Security number to access a payday loan, and now the debt collectors are calling me. I did pay one of the loans, but now found out that there is another. They keep calling me saying they are going to get someone to come and "serve" me. I tried explaining that it was not me that took out the loan, it was the relative. But they are still demanding payment and are constantly threatening. Is it possible for them to send someone to serve me, or take me to court? How can I prove it wasn't me, or get information to try and tell them that I did not take out the loan. I shouldn't have even paid the first one, but I did. The second loan is much too much to have to pay for for something I did not even borrow. Any advice or links to look through?
    0 Votes

    • BA
      Oct, 2012
      Bill
      Go talk to your (highly irresponsible) relative. If s/he doesn't make good, explain that you may have no choice but to reveal the fraudulent activity, if you are sued and at risk of a garnishment.
      0 Votes

    • AG
      Oct, 2012
      Ashley
      unfortunately, he is in jail for bounced checks. Thank you.
      0 Votes

    • BA
      Oct, 2012
      Bill
      In that case, you do not risk harming this relative's feelings by following this steps found in the Bills.com identity theft article. Follow the link just mentioned to learn how you can document the identity theft, then share this information with creditors who pursue you for debts you did not incur.

      As a matter of law, there is no correlation between an unscrupulous person using a victim's Social Security number and the victim having legal liability for a debt. A Social Security number is a piece of identification, and the law does not look at it as the equivalent of a signature or promise to pay. Therefore, just because an unscrupulous person uses an unwitting victim's Social Security number when applying for a loan does not mean the victim is obligated to pay the debt.

      Here, the collection agent has browbeat you into thinking you have liability for the debt, which is not the case.
      0 Votes

  • JO
    Feb, 2012
    Jean
    I had a process server call me at work today. He refused to tell me who he was calling for or what the summons was about. He kept asking to speak to my superior. At that moment I was the highest level he could reach. I was not being rude and told him sold. But he refused to listened. The only way I found out what company was because he left a message on voicemail at home for someone else. I called the company and they were able to find the case. Told me they were not responsible for him but would notify his superior. I did pay what they said only with the condition that once I found the document that it was paid. I would receive my refund. But who can I complain to regarding this process server?
    0 Votes

    • BA
      Feb, 2012
      Bill
      Contact the attorney general's office in your state.
      0 Votes