What Kind of Debt Are Payday Loans?
From a legal point of view, payday loans fall under the category of unsecured debt. Unlike a mortgage or auto loan, there is no property or collateral backing the loan. Lenders cannot repossess your assets for nonpayment, but they may pursue aggressive collection efforts. These actions can include frequent calls, negative credit reporting, or legal threats. However, you have legal protections—especially if you consider bankruptcy as a solution.
Can Payday Loans Be Discharged in Bankruptcy?
Yes. In most cases, online payday loans can be discharged in bankruptcy. Because they are unsecured debts, they are treated similarly to credit card balances, personal loans, and medical bills.
The ability to discharge payday loan debt will depend on the type of bankruptcy you file and if your debt meets certain legal criteria. It is vital to consult with a qualified bankruptcy attorney in Tennessee to determine eligibility. This also helps you make sure that all legal requirements are met.
Chapter 7 vs. Chapter 13: Which Applies to Payday Loans?
There are two primary consumer bankruptcy options in Tennessee that may impact payday loan debt: Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
Commonly known as a “liquidation” or “fresh start” bankruptcy, Chapter 7 allows eligible borrowers to get rid of most unsecured debts—including payday loans. The process usually takes a few months and provides fast relief from creditors’ actions. However, to qualify, you must pass a means test, which compares your income to the median income in Tennessee. If you qualify, you may be able to discharge payday loans without repayment.
Chapter 13 Bankruptcy
Chapter 13 is more structured. It involves a court-approved repayment plan that spans three to five years. During this time, you make regular payments toward your debts, including payday loans. Not all debts are discharged immediately, but Chapter 13 offers protection from collection efforts and may reduce the total amount owed. It’s a viable option if you have a steady income and want to keep your property or catch up on missed mortgage or car payments.
What Happens After Filing for Bankruptcy?
Regardless of whether you file under Chapter 7 or Chapter 13, several key protections take effect immediately:
1. The Automatic Stay
Upon filing, the court issues an automatic stay. This legally halts all collection activities, including calls, wage garnishments, lawsuits, and emails from payday lenders.
2. The 341 Meeting of Creditors
Within weeks of filing, you’ll attend a brief hearing with a bankruptcy trustee. This meeting is an opportunity to answer questions about your financial situation—not an adversarial trial.
3. Discharge of Debt
If your case proceeds without objection and you meet all requirements, your payday loans and other qualifying debts will be discharged at the end of the process.
