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 loan? Will you face jail time?
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, the majority of jail sentences stem not from the failure to repay the debt but are instead for 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.
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.
Fraud occurs when a person knowingly takes out a loan with no 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 they anticipated, and they’re unable to pay back the loan.
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 to do so. Some debt collectors even resort to calling you at work or making threats to get you to pay. These threats may include having you check it out arrested.
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