The Truth About Pay Day Loans

In my time as a consumer bankruptcy attorney in Colorado, I have heard many stories of bad creditor behavior: threats, lies and bad attitudes. But nothing compares to the stories I hear about pay day loan lenders. In my experience, they are the most unsavory, untrustworthy, terrible people to owe money to and the lies they tell always include the threat of criminal prosecution. So, what is the truth? Can they throw you in jail? Well, here is what you need to know if you have pay day loans.

The Jail Threat

If you are behind on a pay day loan, you have probably heard from the loan collector and that person has likely told you that if you didn’t make a payment today, they were going to file papers in a local court and have you arrested. That will get your attention! Yikes! However, they are LYING. First of all, only a local attorney, licensed in your state, can file a lawsuit and most of these collectors are calling you from seedy collection agencies located in other states.

Second, the only recourse a pay day lender has if you fail to pay them is to file a civil law suit in your jurisdiction. A civil law suit seeks monetary damages meaning MONEY. There is no jail time for a civil lawsuit judgment. Additionally, in Colorado the lawsuit has a cap, a maximum amount you can be held liable for if you default on a legal pay day loan: the amount of the loan plus a $25 returned check fee and attorney’s fees not to exceed $500 (the maximum legal pay day loan amount in Colorado).

The most important thing to understand is that only the District Attorney’s Office in your jurisdiction can file criminal charges. Period. No one can just walk in to the police station and “file” charges against you. It is a complex process and the District Attorney’s office files criminal charges after police investigations and arrests. It is not a crime to fail to pay a pay day loan in Colorado. However, there is one loophole it is important to understand. The loophole of the closed account.

Colorado Revised Statute 5-3.1-120 deals with potential criminal culpability relating to unpaid pay day loans. It reads:

“A consumer shall not be subject to any criminal penalty for entering into a deferred deposit loan agreement. A consumer shall not be subject to any criminal penalty in the event the instrument is dishonored, unless the consumer’s account on which the instrument was written was closed before the agreed upon date of negotiation, subject to the provisions of section 18-5-205 , C.R.S.”

Section 18-5-205 says:

“Any person, knowing he has insufficient funds with the drawee, who, with intent to defraud, issues a check for the payment of services, wages, salary, commissions, labor, rent, money, property, or other thing of value, commits fraud by check.”

So, what do these two sections mean? Basically, you are protected from criminal liability for failure to pay on a pay day loan unless you close your bank account before the lender is supposed to take a payment out. If that happens, the District Attorney would still have to prove that you closed the account with intent to defraud the lender. Taken together, this creates a very hard case to prove even if you did close your bank account before the bill was to be paid. The DA would have to prove, beyond a reasonable doubt, that you closed your account specifically to avoid paying the pay day loan and not for any other reason. Because if the difficulty the DA would have in proving this, and the low stakes involved (always under $500 in Colorado by law) it is extremely unlikely that anyone would be prosecuted for closing a bank account that was supposed to pay out a pay day loan.

However, because of this loophole the safest thing to do if you cannot pay the pay day loan is to simply start banking elsewhere, but leave the original account open, just with insufficient funds. The worst they can do to you, legally, is sue you in civil court to get a judgment to recover the money you owe them. This judgment can then be used to garnish your other bank account(s) or wages.

You CAN Get Rid of them in Bankruptcy

Another lie the pay day lenders like to tell is that pay day loans will not go away if you file bankruptcy. NOT TRUE. Pay Day loans are dischargeable in bankruptcy. Therefore, if you are using pay day loans to bridge the gap between pay checks because of a garnishment, high credit card bills or medical bills then bankruptcy might be a good solution to your debt problems. Just don’t fall for the lie that bankruptcy won’t get rid of this type of debt, it just is not true.

How Do They Get Away With All the Lies?

Bill collectors lying to try to coerce a payment out of someone is nothing new. The law that protects you from such behavior (The Fair Debt Collection Practices Act or FDCPA) only applies to third-party collectors. It prohibits lies and harassment (for more on the protections of the FDCPA, see our blog post on the subject) and can be effective in defending your rights and making creditors pay for their bad behavior. However, it is basically impossible to defend yourself against an unknown or overseas foe.

Many pay day loans are done online, through very sketchy organizations who are actually located overseas. In these cases, you receive nasty phone calls but can’t really track down where they are coming from and therefore can’t really track down the culprits. The good news here is that if you can’t find them, they for sure aren’t going to sue you. Then you would have all their information. But if you are being harassed and lied to by a local organization, then you have more options.

The bottom line is that no one takes out pay day loans in a good situation. They are a terrible deal and people who use them are trying to make ends meet during difficult financial times. Dealing with added stress from lender lies isn’t something you need to suffer through. If you are struggling with pay day loan debt, it would be a good idea to call a local bankruptcy attorney who offers a free consultation with an attorney (only attorneys can give legal advice, so anyone who starts you with a non-lawyer is to be avoided!) and find out what your debt relief options are.