If you’re thinking about advancing your financial situation with a payday loan, you might also be wondering: can payday loans take you to court?
Specifically, can you be prosecuted or sued if you default?
The short answer is yes.
But the situations that this can occur in vary.
In a perfect world, you would pay your payday loan as scheduled. But we all know the world is far from perfect and stuff happens.
It’s always important to understand state and federal laws around collections. But in order to be truly prepared, you have to know what to expect.
Below are some collection practices you can expect if you default on your payday loan:
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Payday Loan Terms
Instant payday loans are small, high-interest personal loans payable at the time of your next paycheck. When you take out a payday loan you agree to certain terms.
In order to get a cash advance in the form of a payday loan, you need to have proof of employment and a checking account in good standing with your financial institution. You also must provide photo identification.
A license is required for a storefront to operate as a payday lender. These units often consist of financial services and cash checking service providers and some pawn shops.
Typical terms allow lenders to hold the borrower’s paycheck to collect a lump sum payment, which includes interest, during the nearest pay cycle.
After an agreed upon amount of time, the lender will collect on the payday loan by pulling the amount of the loan plus interest out of the account.
If the transaction cannot be completed for the agreed upon amount, the loan usually goes into default.
Steps in the Collection Process
A loan in default initiates a common collection process for lenders who want to ensure the debt is paid. That process goes like this:
- Bank withdrawal attempt
- Opportunities to be proactive
- The potential for criminal court filing (unlikely)
- The potential for a lawsuit (more likely)
Here’s what you can expect if you have an unpaid payday loan:
Step 1 Bank Withdrawal Attempt
Payday loan lenders withdrawal automatic debits from a borrower’s checking to collect on a loan that’s due.
They start by initiating a single debit for the lump sum amount. If that doesn’t work, they will break the amount due into smaller debts to get whatever they can garnish from the account.
Borrowers should be aware that each of these transactions can cause fees if the account is low or overdrafted.
Step 2 Collections
Federal law allows lenders to deploy a collections agency that will send letters from attorneys and make calls to the borrower and references.
Collection agents aren’t allowed to give out any personal information about the debt to friends and family members who may have been used as a reference. However, they can ask the whereabouts of the borrower.
Collection calls can be a frequent occurrence which can become an annoyance to borrower’s who default if not handled properly.
You should always endeavor to speak to collection agencies to negotiate your debt and make payments when you can.
Step 3 Be Proactive
Be proactive in negotiating your debts.
It’s more beneficial for a lender to work with you on collections. If a person files for bankruptcy lenders lose their chance to collect.
If you’re feeling pressured, tell collectors “I’m thinking of filing for bankruptcy.” Doing this gives you power in the negotiation process.
Step 4 Potential Criminal Court Filing
Lenders can’t take you to criminal court, but that doesn’t stop them from saying they can and trying.
Lenders will look for prosecuting loopholes to collect on debts. They may threaten jail-time, illegally, or even get a court order erroneously approved.
This can make the borrower’s life more difficult, as going through the motions of the court order is required for legal compliance.
Anyone being threatened by a lender with jail time should contact the state attorney general.
Step 5 Lawsuit
While lenders aren’t allowed to have you prosecuted for non-payment, they can summon you as the defendant in a civil lawsuit. Even if the defaulted payday loan is small, you can still get a court order.
Working With Collectors
If you are in a financial situation where you are being called frequently by debt collectors, you may feel overwhelmed and resist talking to them. But that’s not the best idea if you are going to clear your debt and repair your credit.
Here are some best practices to ease the overwhelm and reduce your overall debt:
A Case Against Cease & Desist
If you’re feeling frustrated with collection attempts, you may be tempted to send a cease and desist letter on your own or through an attorney. But don’t do it.
These communications destroy any chance of a relationship between the collections agency, lender, and borrower. This often triggers a lawsuit.
In the long run, you are much better off just answering the phone.
Control the Conversation
To get good footing early on in the negotiation process, control the conversation by asking the right questions.
Don’t get caught up in answering questions and demands of a bill collector. Instead, calmly and affirmatively ask them their name, company, direct phone number and reason for calling.
When you speak with collectors, be honest about your financial situation and ability to pay. If you cannot pay, be honest about that too.
If it makes sense for your financial situation, mention that you’d like to avoid bankruptcy which should give you some additional negotiating power.
Tell Then Friends and Family Are Off Limits
If a collector is calling your friends and family to find you, ask them to cease those collection attempts.
If they refuse, document incidents in which friends and family are contacted to build a legal case against collectors.
How to Avoid Court
To avoid court, borrower’s should negotiate with lenders. In addition to negotiating with lenders, here are some best practices for taking control of your defaulted payday loan debt:
Have a Household Budget
Get proactively organized with your family expenses. Know what bills need to be paid when and have a strategy in place to knock it out.
If you’re so inclined, you can use a spreadsheet. But a number of budgeting apps are also available on a wide range of devices to serve this purpose.
Get Your Priorities Straight
Something that can be done during the formal budgeting process is prioritizing your bills for payment.
Keep your payday loan at the top of your priorities list to avoid going into default.
Keep In Touch with Lender
It’s always good to avoid going to collections if you want to avoid legal problems.
By staying in touch with your lender, you may be able to avoid collections completely.
Let your lender know what’s going on and try to get an extension before your loan defaults.
Make More Money
It may be easier said than done, but if you think you may be in a bad financial situation to pay your loan look for opportunities to make extra money.
Whether taking up odd jobs for a weekend or doing some freelance gig work online, look for ways to get paid before your loan due date.
In an earlier part of this article, we mentioned debt collectors can’t legally threaten criminal prosecution against an indebted borrower, but there are a few loopholes that make it possible. These are:
- Debtors can be arrested for missing court: if you miss a court date, either because you didn’t realize you had one, or you thought it was frivolous, you can be arrested in some states.
- Debtors can be arrested for check fraud: if you bounce checks to lenders in some cases this may make a case for check fraud
- Debtors can be arrested for failing to pay or return merchandise: in a rent-to-own situation this can be cause for arrest
Debtors should be aware of the laws of their states when it comes to debt.
Can Payday Loans Take You to Court?
Can payday loans take you to court?
Yes, payday loans can you take you to court. It is unlikely payday loans will result in a criminal court summons, more often there is a lawsuit that takes place.
To avoid getting wrapped up in a potentially costly, time-consuming lawsuit. It’s recommended that those who default on payday loans settle debt with collectors.