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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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Bill's Answer
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Updated: Oct 23, 2014

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

292 Comments

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  • RN
    Apr, 2014
    Robert
    Louisiana has a set of conditions for any payday loan lender -- including limits on the amount and interest, and they must be licensed, and have a brick-and-mortar business in the state regardless of the Internet. I took out a loan with one of these Internet companies not realizing it was in violation of multiple state laws. I paid back more than the principal, and legal interest, but couldn't pay back the rest.
    1. Would it be loansharking if the loan violates state requirements?
    2. What recourse could the lender have in court since it was an illegal loan?
    0 Votes

    • BA
      Apr, 2014
      Bill
      Start by filing a complaint with the Louisiana Office of Financial Institutions. See the Bills.com Payday Loan Laws page for a hyperlink to this regulator. Also file a complaint with the Consumer Financial Protection Bureau.

      Regarding your questions, contact your state attorney general's office to learn if non-Louisiana-licensed consumer lenders are permitted to file actions for delinquent debt in your state. Some states prohibit unlicensed lenders from taking court action against their residents. Learn if your state is one of them.

      Consult with a Louisiana lawyer who has consumer law experience if you receive notice of a lawsuit against you.
      0 Votes

  • RJ
    Apr, 2014
    Rodney
    I obtained an Internet pay day loan about 4 years ago. I was trying to avoid bank fees because I did not have the cash to repay it and closed the account. I have since filed CH.7 bankruptcy and received my discharge. The lender said they are going to serve me a summons in the county in southern Ca. that I reside in and are claiming it was fraud and I never had any intention to pay it back. Can they even do that after a bankruptcy?
    0 Votes

    • BA
      Apr, 2014
      Bill
      When a person files bankruptcy, they are required by the bankruptcy code to include a full and complete list of all assets and liabilities. Did you include the payday loan in your bankruptcy schedule?

      If you included the payday loan, which as just mentioned you should have, and this loan was included in the discharge, the lender cannot collect this debt. If the payday lender or a collection agent files a lawsuit against you, consult with a lawyer immediately and give copies of your discharge paperwork to your lawyer. Your lawyer will file an answer to the court, including a motion to dismiss based on the debt being discharged in your bankruptcy.

      In the meantime, the collector may try to bully you into making a payment on this debt, or signing a reinstatement document. The fraud charge claim is a bullying tactic. Don't fall for the collector's nonsense. Consult with a lawyer before you take any action the collection agent asks.
      0 Votes

  • PB
    Apr, 2014
    Paul
    I live in Nebraska and took out an online payday loans last year. I did not know at the time that they are not even legal in Nebraska. I have had several call me and sent letters t me. I have spoken to the Regulators in Nebraska and they told me that these companies have no legal ground in the state since Online payday loans are not legal Now NCA is sending me letters claiming I owe 1400+ for a payday loan which is almost 3 times the legal limit for even In State payday loan companies I am going to contact the State again and send this letter to them. I paid the loan company more money then what the legal limit even was before I closed my Bank account to get them to stop taking money out every other week for months. Should I contact NCA and tell them to stop since NCA already knows these Payday loans are not even permitted under Nebraska law.
    0 Votes

    • BA
      Apr, 2014
      Bill
      Excellent research. Now use what you learned to your advantage.

      Send NCA a cease communications notice, and then file a complaint with your state's attorney general if NCA continues to collect a loan your state considers illegal.
      0 Votes

  • JC
    Mar, 2014
    joray
    Thank you for the article. It helped tremendously. I am on Social Security disability, and a collection agency is threatening me saying a felony charge will filed against me for $98. Thanks for the help in the article posted.
    0 Votes

    • BA
      Mar, 2014
      Bill
      No problem Joray. Thanks for the post and we are glad that we helped you out a bit.
      0 Votes

  • J.
    Feb, 2014
    Jeff
    I think I might have been the victim of one of these recently... the more time passed, the more I felt like I might have been scammed. But since he had information about what I think was a real payday loan, I paid it. What should I do? Should I submit a chargeback to my bank to get the money back? Consult a lawyer?
    0 Votes

    • BA
      Feb, 2014
      Bill
      Consult with a lawyer immediately, describe the details of your situation to him or her, and act accordingly.
      0 Votes