Although taking out a payday loan may seem like a quick solution to a temporary cash shortfall, in most cases it actually sends borrowers deeper into debt. In fact, the Consumer Financial Protection Bureau (CFPB) issued a report showing that over a 14-day period, 80% of borrowers end up having to roll over their payday loan, or apply for another loan to cover the original payday loan. That means only 20% of borrowers actually have the money to pay back their loan as scheduled on their next payday.
So, what happens if you find yourself among the 80% of borrowers who can’t afford to pay back their payday loans? 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 are 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 aforementioned 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 pay back their payday loan. According to The Wall Street Journal, most jail sentences stem not from the failure to repay the debt but are instead from failure to appear in court, or for not following a court’s ruling on your case.
The Consumer Financial Protection Bureau, which is responsible for regulating payday lending at the federal level is very clear: “No, you cannot be arrested for defaulting on a payday loan.”
A U.S. court can only order jail time for criminal offenses, and failure to repay a debt is a civil offense.
What’s the difference? Criminal charges involve a crime against the state. Civil charges involve disputes between individuals or businesses.
Therefore, 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 a fraud.
“Failure to pay back a loan is not necessarily fraud,” says Ben Michael, a criminal defense attorney at Michael & Associates.
Fraud occurs when a person knowingly takes out a loan without intention of paying it back. It’s a form of deceit. In addition to having to prove this was the borrower’s intent in a court of law, the debt collector would also have to prove that the borrower was fully aware that their bank account would be empty a week after the loan, when the repayment was due to be collected.
In most payday loan debt cases, a borrower simply doesn’t realize how much the interest and fees add to the total cost of the payday loan. Interest rates on some of these loans can be higher than an annual percentage rate of 400%. That adds up quickly. When the payment comes due, the total is higher than anticipated, and they cannot 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. They often begin calling the borrower — and sometimes their friends or family — right away. Many do so at all hours of the day and night. This can be very stressful for the borrower, who wants to repay their loan, but just can’t afford it. Some debt collectors even resort to calling you at work or making threats to get you to pay. These threats may include having you arrested.
The Federal Trade Commission put into law the Fair Debt Collection Practices Act, which is a federal law 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, nor can they 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’s 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 result from not cooperating with the courts, not the fact that you owe a debt.
While you may be tempted to ignore a court summons, DO NOT DO THIS. Appearing in court is intimidating and inconvenient and may cause you to have to miss work, but if you fail to appear, not only will jail be on the table, but a judge could order wage garnishment.
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 than 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. Many attorneys offer a free initial consultation.
- Abide by all court rulings.
What About the Horror Stories?
Debt collectors will often stoop to low levels to coax a payment out of a borrower. CNN Money reported on several collection agencies that used such scare and intimidation tactics as 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 child care. When a borrower can’t attend one of their court hearings for an unpaid debt, the debt collectors go straight to pursuing an arrest warrant. In many cases, an 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 pleading with the courts to establish fair laws regarding debt.
The Bottom Line
You cannot go to jail for failing to repay a payday loan. You can, however, be sentenced to jail if you miss a court appearance or ignore a court summons. Be proactive and ensure you’re there and fully prepared for any court challenge. Better still, work with your lender first to avoid any court summons in the first place.
Attorney fees will usually depend on the complexity of your case. They will charge you based on the scope of work, amount of debt owed, and difficulty of settlement. The good news is that most law firms offer a free initial consultation, which can help you figure out a strategy if you’ve received a court summons or are thinking about filing for bankruptcy.
The main difference is the loan amounts. While payday loans are small sums of money ranging from $100-$1,500, installment loans allow for higher loan amounts that can go as high as several thousand dollars. A payday loan generally doesn’t require a credit check, while your credit score will matter if you apply for an installment loan.
Confirm the information with your state regulator or attorney general to learn whether a payday lender is licensed to do business in your state.
Many states don’t allow payday lending, and some states that do allow payday lending require lenders to be licensed. In some states, if a payday loan is made by a business that isn’t licensed in your state, the payday loan may be invalidated.
If this happens, the lender may not be able to collect or require you to repay your payday loan.