I want to start with a disclaimer – I really hate these guys. When we opened our bankruptcy practice in 1999 we saw very few payday loan companies. Then, within a couple of years, they started appearing on every file we saw. In 2005 we published a composite of the “average bankrupt – Joe Debtor” and payday loans made up a significant part of their debt. Since then, the total amount of payday debt for our average client has risen in each successive report. Today 1 in 8 clients have a payday loan with an average balance of $2,500.
What I find truly disturbing is that in 2008 the Province of Ontario, which is where I live, brought into force new legislation and regulations that should have curbed payday loan use. One of the key features was a provision prohibiting loan roll-overs (taking out a new loan as soon as an existing loan was repaid). Based on my discussions with current clients, this feature is not being enforced. In fact, it is apparent that having enacted the law, payday loans just adapt, offering new product terms that work around the intent of new legislation.
On the off chance that someone is reading this article that may be unfamiliar with how a payday loan works, here’s an example: Bob finds himself short cash on Friday, but doesn’t get paid for another week. He goes and borrows $250 from a payday loan outfit. The loan is due next Friday when he gets paid and the balance payable is $300. Bob now finds himself short again and so has to borrow again before his next payday. And so on, and so on, and so on…
To get around the roll-over rules people would start using multiple payday loan companies – I have seen individuals that were using 6, 7, 8 and more different companies and the total amount of payday debt was well into the thousands of dollars. Serioulsy, payday loans are a hole that it can be very difficult to climb out of.
Break the payday loan cycle
One of the solutions that people have found to break the payday loan cycle to file an assignment in bankruptcy. While I have seen this done simply to deal with payday loans, in most cases payday loans are just part of the financial mess people need to deal with. They have too much of every kind of debt – the payday loans are the final straw that breaks their back.
Bankruptcy, or a consumer proposal, will certainly deal with payday loans, along with credit card debt, tax debts, unpaid bills and other other unsecured debts. It is really a matter of assessing a person’s total debt and financial situation, then determining which debt solution makes the most sense.
A final word of warning that we give to all of our clients – many payday loan people, once they receive notice of a bankruptcy or a consumer proposal, try to use the fact that you filed and no longer have to deal with all of your other debts to suggest that you should repay the payday loan. They are after all small amounts and “didn’t they help you out when you need cash?” Don’t fall for these tricks. If you have filed bankruptcy or a consumer proposal and your trustee or the Court finds out you have repaid one of your creditors your bankruptcy or proposal may be cancelled. Worse, you may be ordered to repay all of your other debts in full because you repaid the payday loan. It is just not worth it.
Have you used payday loans in the past? Are you using them today? What advise can you give our readers for dealing with your payday loans.