Although taking out a payday loan may seem like a quick solution to a temporary shortfall of cash, in the majority of cases, it actually sends borrowers deeper into debt. In fact, the Consumer Financial Protection Bureau (CFPB) issued a report showing that in a 14-day period, 80% of borrows end up having to rollover their payday loan or apply for another loan to cover the payday loan. That means only 20% of borrowers actually have the money to pay back their payday loan.
So, what happens if you find yourself among the 80% of borrowers who can’t afford to pay back their payday loan? Will you face jail time?
What does the law say about being jailed for not repaying debts?
When we read 28 U.S. Code § 2007, “Imprisonment for debt,” we find that the federal government leaves the imprisonment of debts up to each state. A total of 41 states have language in their state constitutions that prohibit the jailing of an individual for not repaying a debt. The nine states that do not have this clause include Connecticut, Delaware, Louisiana, Maine, Massachusetts, New Hampshire, New York, Virginia, and West Virginia.
Although there are no laws to stop imprisonment for debt in the above mentioned U.S. states, it is still highly unlikely that a person would face jail time when they fail to come up with the money to payback their payday loan. The Wall Street Journal reports that the majority of jail sentences are not from the failure to pay the debt back, but for failure to appear in court or for not following through on the court’s previous ruling on the case.
The Consumer Financial Protection Bureau, which is responsible for regulating payday lending at the federal level says “No, you cannot be arrested for defaulting on a payday loan”.
A court can only order jail time for criminal offenses in the US, and failure to repay debt is not a criminal offense. Lenders can only take you to civil court – not criminal court.
Failure to repay payday loan debt is not fraud
One way debt collectors try to intimidate borrowers is by claiming the borrower committed fraud, which is a criminal offense. A person can face criminal charges in a court of law if they commit fraud; however, taking out a payday loan and then not being able to pay it back is not fraud.
Fraud occurs when a person knowingly takes on a loan with no intention of paying it back. It’s a form of deceit. In addition to having to prove this in a court of law, the debt collector would also have to prove that the borrower knew their bank account would be empty the following week when the repayment was due to be collected.
In most cases, a borrower simply doesn’t realize how much the interest and fees add to the total cost of the payday loan. When the payment comes due, it’s more than they anticipated, rendering them unable to pay back the loan.
In fact, in most cases, it’s illegal for collectors to even threaten jail
Debt collectors don’t waste any time when a borrower doesn’t repay their payday loan by the due date in the contract. They often begin calling the borrower right away. Many do so at all hours of the day and night. This can be quite stressful for the borrower, who wants to repay their loan, but just can’t afford to do so. Some debt collectors even resort to making threats to get the borrower to pay. These threats include having the borrower arrested.
The Federal Trade Commission put into law the Fair Debt Collection Practices Act, which is designed to protect consumers against abuse by debt collectors. This act states that debt collectors can only attempt to contact you between the hours of 8 a.m. and 9 p.m. They also can’t call you at work if our job prohibits outside communication or harass you or anyone you know about the debt.
According to the CFPB, there are three things you can do if a collector threatens to have you arrested.
- File a report with your State Attorney General. If you don’t know who your State Attorney General is, you can find his or her information by contacting the National Association of Attorneys General by visiting naag.org or by calling 202-326-6000.
- File a report with your State Regulator. The CFPB has a list of each state’s Bank Regulator and their contact information on their website.
- File a report with the CFPB by calling 855-411-2372 or by filling out their online form.
However, ignoring court orders can lead to arrests
The CFPB states that “if you are sued or a court judgment has been entered against you and you ignore a court order to appear, a judge may issue a warrant for your arrest.” Your jail time would be a result of not cooperating with the courts, not the fact that you owe a debt.
There are a few things you can do to avoid jail time.
- Contact the payday loan lender and negotiate for better terms. This shows you want to repay the loan, and in many cases, the lender would rather settle for a smaller payment over a longer period of time then no money at all.
- Reach out to a bankruptcy attorney to go over your finances and see if filing Chapter 7 or Chapter 13 bankruptcy is advisable. Both of these filings cover payday loans.
- Seek advice from a credit counselor. A credit counselor may be able to consolidate your debts, provide you with a smaller interest rate and offer you better repayment terms.
- Attend all court proceedings. If you can, consult with an attorney. The attorney may be able to intervene and get the lender to agree to a new repayment plan that you can actually afford.
- Abide by all court rulings.
What about the horror stories?
Debt collectors will often stoop to low levels in order to coax a payment out of a borrower. CNN Money reported on several collection agency that used scare tactics, like threatening jail time and sending child protective services to the home. The online news magazine also revealed that one collection agency went as far as to threaten to kill a debtor’s dog.
After investigating, CNBC found that most borrowers are busy working multiple jobs and trying to juggle childcare. When the borrower can’t attend one of their court hearings for an unpaid debt, the debt collectors go straight to pursing an arrest warrant. In many cases, the arrest warrant is issued.
Fortunately, the American Civil Liberties Union (ACLU) is committed to abolishing jail time for individuals who owe a debt. They are dedicated to uncovering the unjust practices of debt collectors and to pleading with the courts to establish fair laws when it comes to debt.