The payday loan trap is scary. Once you’re caught, predatory lenders will use all kinds of underhanded tactics to make more money off of you. One of their favorite strategies is to threaten you into paying them, even if it means that you have to take another loan out to do so.
Legal penalties are a common theme among these threats. You’ll receive calls at all hours about pending lawsuits that might end with you in jail if you don’t pay up. But can payday lenders sue you and take you to court? And what happens if they try?
Can payday lenders sue you or take you to court?
Unfortunately, yes – payday lenders have the right to sue you and take you to court if you default on your payments or otherwise violate your loan agreement. When you take out a payday loan, you’re signing a legally binding contract that can’t be broken without repercussions.
But even though lenders will follow through on their threat if they have to, they probably don’t want to. Court proceedings, even in a small-claims court, are expensive and time-consuming. It’s usually not worth getting stuck in a drawn-out legal battle.
Instead, they’d usually rather negotiate with you outside of court since they’re more likely to collect that way. That means you can probably avoid legal problems if you’re proactive and reach out to your payday lender when you know you won’t be able to pay them back.
If your balance is small, you might hope that your lender won’t sue you and be tempted to call their bluff. That would be a mistake.
Payday loans are often for small balances initially, but the interest and fees can quickly compound it into a significant amount. If you ignore the problem, your lenders can and almost definitely will sue you.
What should you do when a payday lender sues you?
Unfortunately, most borrowers who take out payday loans can also have difficulties making it into court for their proceedings because they:
- Can’t afford to take time off of work
- Can’t pay for transportation to the courtroom
- Are too afraid to show up in the first place
But if you’re sued by a payday lender and fail to show up to your court summons, the judge will automatically rule in their favor. This happens all too often, and the court will then work to collect on your debts.
So if you’re summoned to court, make sure that you at least show up. Unfortunately, if your lender comes well prepared, you probably won’t have much of a legal defense unless:
- You have evidence of fraud (the payday loan was taken out by someone who stole your identity)
- You can prove that the lenders were using illegal tactics like threatening you with jail time
What actually happens in court?
For a case surrounding payday loans, court proceedings will be relatively straightforward. Small-claims court, where your hearing would be held, isn’t anything like the criminal trials you see in crime shows.
You and your lender will both tell your sides of the story and present your evidence, often without legal representation, and the judge will make a ruling.
The burden of proof lies with the payday lender, though they’ll only need to demonstrate a “preponderance of evidence” that you’re guilty of owing them money and failing to pay.
That’s a fancy way of saying that they need to prove that it’s “more likely than not” that you’re guilty, as opposed to “beyond a reasonable doubt” (which is much more difficult).
But since most lenders aren’t expecting you to show up, they may not bring any evidence to back up their claims, which would mean that you’d win by default.
Can you go to jail for not paying payday loans?
There are two basic types of court proceedings:
- Civil: disputes between individuals or organizations where a successful plaintiff is awarded compensation for damages
- Criminal: disputes between the government and an alleged criminal offender where an unsuccessful defendant is punished with fines and jail time (and in rare cases, death)
Payday lenders can sue you but can only take you to civil court, which means that a conviction is never going to land you in jail.
Your debt collectors may try to scare you by threatening to send you to jail if you fail to pay, but that’s not possible under the American legal system. They’re limited to:
- Damaging your credit
- Penalties and fines
- Attempting to seize your assets
Again, if they do threaten to send you to jail, that can actually work in your favor. Try to get it in writing, so that you can use it as evidence of their illegal practices when you show up to court.
Can a payday lender garnish your wages?
If the judge rules against you in your hearing because you failed to show up or because the lender came prepared, your wages will probably be garnished to help pay off what you owe.
Wage garnishment requires your employer to withhold a portion of your earnings to put toward paying down your debt, though there are hard limitations on what they can take from you.
Lenders can only garnish part of your disposable earnings, which are defined as your wages after taxes and qualifying deductions (in this case).
To calculate the portion that you’d lose to garnishment, calculate the smaller of:
- 25% of your disposable income, if your disposable income is greater than $290
- Any amount greater than thirty times the federal minimum wage
As a quick example, imagine that you were to take home $1,000 a week of disposable income. 25% of $1,000 is $250, but the minimum wage in 2020 is $7.25, and $7.25 times 30 is just $217.50. Since the latter is the smaller number, that would be the limit on your wage garnishment.
While this limits a lender’s ability to take your entire paycheck, it still might be more than you can afford to pay. If so, there are a couple of ways to avoid wage garnishment:
- Hardship claims: If you can demonstrate that the garnishment prevents you from paying for your fundamental living costs, you can qualify for an exemption that reduces or eliminates the wage garnishment.
- Bankruptcy: Bankruptcy has the power to dissolve most of your unsecured debts, payday loan debt included. However, it will do huge damage to your credit score and may cost you some of your property, so it shouldn’t be done lightly.
Can I sue a payday lender?
Yes, you can absolutely sue a payday lender, and you probably should if you have proof that they’re breaking the law. It can help you get your loan forgiven and discourage the practices of predatory lending, which can only be a good thing.
Unfortunately, the regulations for payday lending aren’t very strict right now. Your best bet would be to document proof that they’re threatening you in some illegal way.
However, in 2020, new legislation has been put forth by over a dozen states that will:
- Cap the interest and fees on payday loans to 36% APR
- Increase max payday loan amounts from $500 to $2,500
- Limit repayment terms to between 4 months and 24 months
If the new legislation goes through, you could have many more ways to bring the power of the law to bear against your payday lenders.
What if your lender isn’t doing anything illegal?
Even if you can’t sue your payday lenders, you can still find other ways to fight back against them and escape your debts.
If you’re struggling with payday loans, using an expert’s services can be a great help. Debt Hammer can serve as a middle-man between you and your payday lender. We’ll stop their threats, negotiate down your loan amount and monthly payments, and create a workable plan to get you out of debt for good. Contact us for a free consultation so we can help you fight back against your payday lenders today.