Individuals experiencing financial hardship may mistakenly believe that defaulting on a payday loan results in an arrest or spending time in jail. As reported by USA Today, debt collectors threatening individuals they could face fraud charges may have crossed the line of legality.
The American Civil Liberties Union notes that the U.S. abolished debtors’ prison by an act of Congress in 1833. While payday loans may come with high-interest rates, an individual may not face incarceration for an inability to make a payment.
The collection process and halting it through an automatic stay
Payday loans generally require identification, proof of employment and a checking account. Some lenders do not consider an applicant’s credit score. Individuals typically repay the loan with an automatic checking account withdrawal on his or her next payday.
If a debtor defaults, a creditor may attempt to garnish wages or levy the bank account. The loan’s agreement may include the legal actions a debtor may face if he or she fails to uphold its terms. An individual who qualifies for bankruptcy, however, may stop the collection process through an automatic stay.
Economic hardship and filing bankruptcy for relief
Kentucky’s laws currently do not place a cap on the interest rates charged by payday loan lenders. As illustrated by CNBC, the payday loans in the Bluegrass State may come with an annual interest rate over 400%. If an individual loses his or her job, becomes ill or has trouble making ends meet, payday loans may end up becoming the priority.
To pay off a high-interest loan, an individual may decide to stop making payments on other debts, but doing so could snowball into a devastating financial situation. Filing for bankruptcy, however, may provide relief from high-interest payday loans while also discharging credit card debt, personal loans and medical bills.