Payday lending services versus bankruptcy: What’s the best option?

By May 27, 2014No Comments

Many individuals struggling under enormous debt aren’t sure where to turn but are simply desperate for relief. Some ask relatives or family members for a loan; others utilize payday lending services.

However, payday lenders come with strict stipulations and often have stringent requirements. It’s logical that some debtors may not want to file for bankruptcy. It’s a big step and in some areas of the country, still considered taboo.

However, understanding the relief offered through payday lending services versus bankruptcy may give consumers a better idea of what route is best for them.

Payday lending services

Payday lending services are essentially companies that provide short-term loans to consumers who just can’t seem to make ends meet, or are drowning in debt and have nowhere else to turn.

According to a recent report, an average loan from a payday service is around $375. And, qualification for such a loan is fairly easy-even for consumers with bad credit.

However, many of these loans come with big catches. First, these types of services typically have exorbitant interest rates.

Hefty interest rates

Typical payday lenders often charge 100 percent or more in interest on loans-this equates to about 35 times more than an average credit card rate. In Mississippi and Wisconsin, for instance, interest rates on payday loans have been found as high as 574 percent. The state of Minnesota is considered one of the states that has the “lowest” payday lender interest rate of 196 percent.

Due to the extreme rates, a consumer who borrows $300 can easily expect to pay back $800.

Many individuals, however, feel as if they have nowhere else to turn. Despite the lower interest rates on credit cards, many consumers have already maxed out their credit cards trying to make ends meet throughout the year.

But filing for bankruptcy may be another option for those struggling to pay down debt.

Bankruptcy as alternative option

The data shows that the average household income for those who live in areas where payday services pop up averages between $18,000-$26,000. This range would presume qualification under a Chapter 7 bankruptcy.

Chapter 7 bankruptcy is essentially a liquidation bankruptcy and typically takes 90 days to clear away debt. The debtor’s income and expenses are verified and compared against the debtor’s total unsecured debt amount and assets.
Typically, a debtor’s assets are liquidated and the proceeds provided to lenders. However, in most cases, much-if not all-of the debtor’s property is exempt from this liquidation. Property such as clothing, furniture, other household items and certain amounts for the family vehicle cannot be touched and liquidated in bankruptcy.

Once it’s determined that the debtor has no serious assets like a vacation home or fine jewelry, for instance, the Chapter 7 discharge is typically granted and the debtor walks away with a clean financial slate and the ability to start over on fresh financial footing owing no debt.

Getting the facts on all available debt relief options

Of course, every consumer’s situation is different. Consulting with a bankruptcy attorney who knows the law surrounding all available debt relief services is the first step to finding out what debt relief solution is the best.