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Payday loans and bankruptcy: everything you need to know

Posted on 5 June 2023

Written by Samantha Galea

If you have struggled to make everyday payments like bills and to pay off your debts, you may well have considered taking out a payday loan. Payday loans were originally intended for just that – a short term cash loan to tide you over until your next paycheque. If you are able to repay your payday loan in full and on time within the short time period agreed, Canadians can conveniently borrow sums of money to support their financial situations in the short term. If, however, payday loans are not repaid on time, issues can occur. Payday loans carry extortionate interest rates that are much higher than those on credit card debts. They can soon escalate into debt, particularly if you take out multiple loans. If you have found yourself in debt from payday loans, you may wish to file your payday loans in a bankruptcy to have them cleared once and for all. In this article, we share all you need to know about payday loans and bankruptcy to see if it is the right debt relief option for you.

Can you include payday loans in a bankruptcy in Canada?

What are the advantages of filing bankruptcy for payday loan debts?

There are several advantages to filing bankruptcy for payday loans:

  • Payday loan debts are permanently eliminated, along with any other unsecured debts you may have
  • You are no longer tied to making debt payments, and instead can use your money towards your personal living expenses without the need for payday loans
  • You are protected from your creditors via a stay of proceedings

If you are considering bankruptcy as a debt relief option, the sooner you file, the better. This allows you to tackle your debt sooner, begin saving money, and start to rebuild your credit score as soon as possible. This will enable you to be eligible for more preferable credit options instead of expensive payday loans.

Can you include payday loans in a consumer proposal in Canada?

There is a common misconception that bankruptcy is the only form of debt relief to assist with removing the issue of payday loan debt in Canada. In fact, a consumer proposal will also substantially reduce payday loan debt. Consumer proposals are a more favourable option for those with a higher income. Typically, over 50% of Canadians struggling with payday loan debt often exceed the government threshold for income, meaning that they need to pay additional payments during their bankruptcy. This is referred to as surplus income. A consumer proposal will likely make more sense than payday loans and bankruptcy in the following circumstances:

  • You have over $10,000 in debts including payday loans
  • Your income exceeds the government surplus income threshold
  • You have assets you would like to keep, like a vehicle or home equity

At Spergel, we have a 99% acceptance rate on any consumer proposals we file, meaning that when you file with us, you have a 99% chance of significantly reducing your debts by up to 80%.

Does credit counselling assist with reducing payday loans?

Unfortunately, credit counselling is very unlikely to reduce or clear payday loan debt. While credit counselling agencies will try to reduce the interest associated with your payday loan debts, and try to educate you on financial management, they will typically enrol you in a Debt Management Program. Although for some Canadians, Debt Management Programs can be a helpful way to structure their debt and keep them on track to a future free from debt, for payday loan debts, they are of little use. Debt Management Programs are voluntary, meaning that payday lenders are not obligated to participate. In most cases, they will want to reclaim as much of their money as they can, and will not wish to reduce the associated interest rate on the debt. Often with payday loan debts, a more drastic form of debt relief is required. As both bankruptcy and consumer proposals are legal forms of debt relief, creditors need to comply. If you have a lot of payday loan debt and other debts, a consumer proposal or a bankruptcy is a better option as it is legally binding on every creditor if your consumer proposal is approved.

Ensuring your payday loan debt gets eliminated

Below are a few tips and tricks to ensure your payday loan debt is successfully cleared without a hitch:

  • Switch your bank account before filing a consumer proposal or bankruptcy. This will stop your payday lender automatically withdrawing funds from your account, and even claiming that they were unaware of your filing. Both bankruptcy and consumer proposals trigger a stay of proceedings, which means that creditors are not allowed to contact you and try to collect.
  • Stop making payments to your creditors as soon as your bankruptcy or consumer proposal is filed.
  • Ignore requests for payment once you have filed. Some payday lenders may try their luck and attempt collections from you, but there is no obligation for you to pay. Simply remind them that you have filed for debt relief, and you do not need to pay.
  • If you have filed bankruptcy, ensure you complete your bankruptcy obligations on time to ensure it does not prevent or delay your discharge.

If you feel like you are stuck in a payday loan cycle that you want to break, or are struggling to keep on top of your payments, book a free consultation with Spergel. Our expert Licensed Insolvency Trustees are here to help you, and will answer all your questions about payday loans and bankruptcy. We will review your financial circumstances and offer our advice on the best form of debt relief for you. Reach out today – you owe it to yourself.

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Samantha Galea

Samantha Galea is a Chartered Insolvency and Restructuring Professional and LIT (Licensed Insolvency Trustee) who started working with Spergel as a summer student in 2010. With her socio-political background, Samantha is committed to breaking the stigma associated with bankruptcy so that individuals and families can properly understand all of their options on their path to debt freedom. She is also our resident expert on student debt and collection agencies, as well as the manager of our Brampton office. Outside of work, Samantha is an avid reader of historical non-fiction and world traveler.

Schedule a Free Consultation with Samantha Galea (or your local Spergel LIT) by:

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