Payday Loans Are Unsecured and Dischargeable
The most important thing Florida consumers trapped in payday loan debt need to understand is this: payday loans are unsecured debt, and unsecured debt is dischargeable in bankruptcy. Under 11 U.S.C. Section 727 (Chapter 7) and 11 U.S.C. Section 1328 (Chapter 13), a bankruptcy discharge eliminates your personal liability on payday loan obligations just as it does for credit cards, medical bills, and other unsecured debts.
There is no special carve-out in the Bankruptcy Code that protects payday lenders from discharge. Despite what some aggressive collectors may suggest, payday loans do not survive bankruptcy, and you cannot be denied a discharge simply because your debts include payday loan balances.
Florida Payday Loan Regulations
Florida regulates payday lending through a detailed statutory framework found primarily in Florida Statute Section 560.402 through 560.409. These provisions establish important consumer protections:
- Maximum loan amount -- Florida law caps a single payday loan at $500 (or $1,000 with certain extended repayment options under Florida Statute Section 560.404).
- Database tracking -- Florida operates a statewide verification database that prevents borrowers from having more than one outstanding payday loan at a time. Lenders must verify through this system before issuing a loan.
- Fee limitations -- The maximum fee a payday lender can charge is 10 percent of the loan amount for loans up to $500, with an additional 5 percent verification fee.
- Cooling-off period -- After paying off a payday loan, borrowers must wait 24 hours before taking out a new one.
- Grace period option -- Borrowers who cannot repay on time may request a 60-day grace period, during which they must complete credit counseling but incur no additional fees.
Despite these protections, many Floridians find themselves cycling through multiple payday loans, paying only the fees each period while the principal remains unchanged.
The Payday Loan Cycle
The payday loan cycle is a well-documented pattern of financial distress. A borrower takes out a short-term loan to cover an immediate expense, but when the loan comes due on the next payday, they cannot repay the principal without creating a new shortfall. So they roll the loan over or take out a new loan immediately after repaying the old one.
Over months or years, a borrower may pay thousands of dollars in fees on what started as a few hundred dollars in principal. The Consumer Financial Protection Bureau has found that the average payday loan borrower takes out ten loans per year. At Florida's maximum fee structure, a $500 loan renewed ten times generates $500 in fees alone -- equal to the original principal -- without reducing the balance by a single dollar.
Bankruptcy breaks this cycle permanently. The discharge eliminates the underlying obligation, and the automatic stay stops all collection activity from the moment the petition is filed.
Post-Dated Checks and ACH Authorization
Many payday lenders require borrowers to provide a post-dated check or authorize an ACH (automated clearing house) withdrawal from their bank account as a condition of the loan. This creates anxiety for borrowers considering bankruptcy because they worry about checks bouncing or unauthorized withdrawals.
Here is what happens when you file:
- The automatic stay prohibits collection -- Under 11 U.S.C. Section 362, the payday lender is prohibited from depositing your post-dated check or initiating an ACH withdrawal after your bankruptcy case is filed. Doing so is a violation of the stay and can result in sanctions.
- Notify your bank -- As a practical matter, inform your bank that you have filed bankruptcy and request a stop payment on any outstanding post-dated checks to payday lenders. Some attorneys also send direct notification to the lender.
- Revoke ACH authorization -- You have the right under federal law (Regulation E) to revoke an ACH authorization at any time by notifying your bank in writing at least three business days before the scheduled withdrawal.
Criminal Threat Myths
Some payday lenders or their collection agents tell borrowers that failure to repay a payday loan is a criminal offense -- that writing a check that does not clear constitutes check fraud or theft. This is a collection tactic designed to frighten borrowers into paying, and it is almost always baseless.
- Payday loans are civil obligations -- A payday loan is a contract. Failure to repay a contractual debt is not a crime in Florida or anywhere else in the United States.
- Bad check laws rarely apply -- Florida Statute Section 832.05 addresses worthless checks, but courts have consistently recognized that post-dated checks given to payday lenders are not the same as fraudulent checks. The lender knows the check is post-dated and accepts the risk.
- Threatening criminal prosecution to collect a debt violates the FDCPA -- Under the Fair Debt Collection Practices Act, 15 U.S.C. Section 1692e, threatening criminal action to coerce payment of a civil debt is illegal.
If a payday lender or collector threatens you with arrest or criminal charges, document the threat. You may have a separate legal claim against them.
Automatic Stay Stops All Collection
The moment your bankruptcy petition is filed, the automatic stay under 11 U.S.C. Section 362 goes into effect. This federal injunction stops payday lenders from:
- Calling or texting you about the debt
- Depositing post-dated checks or initiating ACH withdrawals
- Filing or continuing lawsuits to collect the loan
- Sending collection letters or making any other attempt to collect
- Contacting your employer or references
Violations of the automatic stay can result in the lender being held in contempt of court and ordered to pay damages, including attorney fees. The automatic stay gives you immediate relief from the stress and pressure of payday loan collection.
Chapter 7 Versus Chapter 13 for Payday Loans
In most cases, Chapter 7 is the fastest and most effective way to eliminate payday loan debt. The loans are discharged entirely, typically within 90 to 120 days, and the borrower pays nothing to the payday lender through the bankruptcy.
Chapter 13 also discharges payday loan debt, though the borrower may pay a percentage of the debt through a three-to-five-year repayment plan depending on their disposable income. For borrowers who do not qualify for Chapter 7 under the means test, Chapter 13 still provides a path out of the payday loan cycle with the added benefit of the co-debtor stay if a family member co-signed the loan.