Can You Be Criminally Charged for Defaulting on Payday Loans?

By John Hewitt

  • Overview

    Can You Be Criminally Charged for Defaulting on Payday Loans?
    Can You Be Criminally Charged for Defaulting on Payday Loans?
    Defaulting on a payday loan is not a crime and can't result in any criminal charges. If fraud is used to take out the loan, the individual can be prosecuted for that--but otherwise, such debt-related issues are not considered to be a criminal matter in the United States. If a payday loan company or collection agency tells someone she can be jailed for going into default on the loan, she is breaking the Federal Trade Commission Fair Debt Collection Practices Act.
  • Significance

    Defaulting on a payday loan has no criminal consequences. Despite this, collection agencies are authorized to attempt to recoup the value of the loan up to a reasonable extent. They may hire a legally authorized repossession company to seize assets for sale in order to meet the debt obligations. Once the debt balance has been paid off or settled either directly or through a bankruptcy settlement, they can no longer attempt to collect on the debt.
  • Function

    In some extraordinarily rare cases, a payday loan company might attempt to sue the debtor to collect on the debt. Cases in such situations fall under the purvey of a civil court. Creditors in some cases can freeze checking accounts or withhold money from paychecks coming into an account. Payday loan companies, once they have bank account information from their customers, can then take out payments directly from that account without the permission of the borrower.

  • Considerations

    Payday loan companies usually operate outside of the national credit bureaus, but going into default on such a loan tends to have severe consequences to the credit report. Bounced checks and balance transfers are automatically reported by banks to the reporting agencies. As these loan companies will attempt to collect on their loans either by debiting an account or depositing a check from it, their repeated attempts to do so if an account has no money has a rapid negative effect on a credit rating.
  • Effects

    Changing bank account information and closing out an account that a payday loan corporation has access to may stop initial attempts at collection, but it does not erase the loan in default. Collection agencies can still pursue the debtor further to collect on the balance of the loan, although it will be more challenging for them.
  • Prevention/Solution

    In some states, the high interest rates charged by payday loan companies are illegal. If the primary residence of an individual is in one of those states, he may not have to pay back the balance of the loan, as it was originally offered illegally. The small size of payday loans and the fact that they are unsecured makes collection lawsuits quite rare. The consequences are typically relatively light--authorized property seizures, wage garnishments up to 25 percent or a mutually agreed upon settlement plan. If the funds are available, however, the lender may be able to collect the amount of the loan in full or in an even greater amount, depending on what the judge in the case decides to award.
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