Can You Go to Jail for Not Paying Back a Payday Loan?

Many borrowers fear what will happen if they fail to pay back their payday loans, though the real repercussions can be hard to figure out. Anecdotal horror stories and lenders who bend the rules tend to blur the truth. Prison comes up surprisingly often in these circles, which can frighten people into making increasingly dangerous financial mistakes. So, is it true? Can you go to jail for not paying back a payday loan?

Don’t worry. Jail isn’t a legal punishment for defaulting on debts. That said, there are many other ways an unpaid loan can make life difficult. Payday lenders, in particular, can be very aggressive about collecting from their borrowers. This guide will explain what actually happens to people who fail to pay back their payday loans.

What the law says about jail for unpaid debts

The Consumer Financial Protection Bureau (CFPB) helps regulate and inform borrowers about lending. They’ve made it clear that law enforcement can’t arrest borrowers for defaulting on any type of loan.

There are two types of offenses and subsequent branches of law:

  • Civil: Legal proceedings are between individuals (or organizations). One party sues the other for failing to perform their legal duty.
  • Criminal: The dispute is between the government and an individual (or organization).  The government seeks punishment for a misdemeanor or felony.

Civil offenses include breaking the speed limit, slander, and breach of contract. Fines and other means of reparation are the only legal punishments. People can’t go to jail for committing a civil offense.

No matter what any payday lender says, not paying a debt is a civil offense (breach of contract). When a court of law convicts a borrower for that, they’ll never have to go to jail.

Criminal offenses are a lot more serious. They include theft, prostitution, and homicide. These are the cases that can land people inside a jail cell.

The difference between fraud and failure to pay

Predatory payday lenders, like tribal lenders, often accuse borrowers of fraud when they default on loans. But don’t worry, it’s bluster.

There are several types of fraud. Some of them are criminal offenses and punishable with jail time. But none of them are synonymous with defaulting on a loan.

Usually, payday lenders accuse their borrowers of committing check fraud. That’s when someone uses a post-dated check to avoid paying what they owe. When a recipient tries to cash the check, there are no funds in the account.

But to convict someone for check fraud, there needs to be evidence of an intention not to pay. That’s very difficult to prove, especially when a borrower says they tried but failed to repay their debt.

Lenders can take borrowers to court for defaulting on their debts, but they can’t legally threaten jail time. If they do make those threats, they open themselves up to countersuits.

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What can payday lenders do if you don’t pay?

Lenders can’t send borrowers to jail for not paying back a payday loan, but they have other options.

Payday loan borrowers usually provide their banking information or a post-dated check upfront. If they fail to pay back their loan, lenders will debit the bank account or attempt to cash the post-dated check.

If the initial debit doesn’t go through, they’ll try to charge a series of smaller amounts to get the last bit of cash in the account. That often leads to overdraft fees.

After that, the payday lender’s next step is usually to sell off the defaulted account to a debt collector. They’d rather avoid that, if possible. It’s usually not very profitable. If a borrower makes an offer that exceeds what the lender would get from a debt collector, they may take it.

It’s much better for the borrower to keep their account out of collections, too. Debt collectors often use underhanded intimidation tactics, including aggressive phone calls.

And if collectors can’t close on a debt, they may take borrowers to court over the balance. It’s often worth it, even if the loan was relatively small.

Payday loans have steep penalties for defaulting. Those penalties and fees can quickly turn a small payday loan into a large sum. And collectors that win a court case against borrowers can garnish their wages to collect it all over time.

Read more: What happens if you don’t pay back your payday loan?

Why is arrest for defaulting such a common myth?

There are two primary reasons that so many borrowers are concerned about going to jail for not paying back their payday loan.

The first is that predatory lenders continue to threaten people with arrests, despite the laws against it. Unfortunately, many borrowers believe them and spread the myth further.

The second reason is that arrests sometimes do happen. Not because a borrower fails to repay their loan, but because they fail to show up to court when summoned.

If a payday lender or a collections agency sues a borrower, they have to at least show up to court. When people miss their court dates, it puts them at risk of arrest for ignoring an official court summons.

On the bright side, showing up to the court proceedings might surprise the lender. If they’re not prepared to prove breach of contract, the court may dismiss the case. That could clear a borrower’s debt, or at least prevent any future garnishment of wages.

What should you do if you can’t pay back a payday loan?

Borrowers who can’t pay back their payday loans should start negotiations with their lender as early as possible. It’s much easier to negotiate a payment plan before the lender tries to collect.

Payday lenders may be particularly susceptible to threats of bankruptcy. Filing for bankruptcy renders many unsecured debts void. They’d be unable to collect or sell the account.

Even if a debt collections agency holds the account, negotiation can still work. It never hurts, and the worst they can say is no.

If the lender or collector has already filed a suit, it might be worth seeking legal counsel. They can help borrowers handle the problem as efficiently as possible. If a borrower can’t afford legal counsel, they should still show up to their court summons.

If you have other questions about how to handle your payday loans, contact DebtHammer. We help borrowers to fight against predatory payday lenders and get out of the payday loan trap.

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