The debate about the payday lending industry has come into sharp focus again as the Consumer Financial Protection Bureau begins to get its legs. But one of the often missed points is that many debtors take out short-term, high interest payday loans because they simply don’t feel they have an alternative. Because of our reluctance to make debtors aware of their bankruptcy options, many Americans facing job losses and mounting bills think first of taking out more debt in the form of a payday loan before they ever consider filing bankruptcy.
But as many have discovered, payday loans only exasperate an already weak financial position. These types of loans are so toxic that even the military has banned active duty members from taking out payday loans. At one point the military realized that the payday lending industries problems were seeping into the financial lives of its rank and file. Some soldiers were taking out payday loans so regularly that a $500 debt would morph into $15,000 in debt over a period of years. Many of those military members needed to seek bankruptcy relief to protect themselves and their family. And it is fortunate that bankruptcy was there to discharge their payday loan debt.
A payday loan debtor can file Chapter 7 bankruptcy and free themselves from thousands of dollars of debt. But the reality is that the payday loan debtor probably should have filed bankruptcy long before they took out their first payday loan. Usually the need for a payday loan is the first sign that there is a need for bankruptcy.