Payday Loans Are Not “Cash Advances” Under Bankruptcy Law

Payday loans are a common source of quick cash if you are in trouble.  It’s the local loan shark; you know you should avoid but you can’t.  Sometimes payday lenders think they’re special in bankruptcy court.  They aren’t.

Typically (in layman’s terms) a “payday” loan is just a short-term loan you take out and promise to pay back within a couple weeks or possibly months.  They can sometimes require you to give them a post-dated check or access to your bank account or debit card so they can take their money — plus their very-high interest — on the due date.  They are usually designed as one-time loans even though many people are forced to roll them over multiple times — for extra fees and interest.

Bankruptcy law gives more protection to some lenders who have made a “cash advance” loan to a person over $925 in the 70-days before a bankruptcy is filed.  Those debts are “presumed” to be protected from discharge unless the debtor can prove they were not committing fraud in taking this money.

Payday lenders have periodically fought bankruptcy with this provision in mind, arguing they were entitled to this presumption.  But in Central Illinois recently, they came up dry.

In multiple cases where the debtor did not present much or any defense, Judge Mary Gorman still ruled against Americash Loans.  Judge Gorman pointed out a little-respected provision that the “presumption” requires that the loan be made under an “open end credit plan.”  A typical example of an “open end” plan is a credit card or overdraft credit line with a bank.  It is not a one-off loan for a fixed amount of money.

Americash could still have attempted to prove a case of fraud for these recent, small loans.  But it would bear the burden of proving something more than that people in desperate circumstances took advantage of a high-rate short-term loan offered by their company to a large part of the public to try to stay afloat.  And they did not have any specific evidence and apparently had simply sought to prevail by “default.”   That’s sometimes a losing strategy when the judge reads the law.

In re David Marquardt, C.D. Illinois, 12/29/16