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.
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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.
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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.
Note that payday loans are illegal in some states, so if you can prove that your payday lender violated state laws, you may not have to repay your loan at all.
READ MORE: States where payday loans are illegal
States where you can — and can’t — go to jail for debt
State laws vary. According to a report by the American Civil Liberties Union, some states cannot order an arrest or jail time for contempt of court. These include:
- Alabama
- New Mexico
- North Dakota
- South Dakota
- West Virginia
- Wyoming
However, if you live in certain other states, you can be arrested for contempt of court.
READ MORE: States where you can go to jail for unpaid debts
Pro tip: You can go to jail for failure to repay certain types of debt. These include child support and unpaid taxes. Both of these can result in arrest, particularly if you fail to follow a court order.
Failure to repay payday loan debt is not fraud
Debt collection agencies might try to scare you by telling you that by failing to repay, you’ve committed fraud, which is a criminal offense that can lead to arrest.
Taking out a payday loan and then not being able to pay it back is not a fraud.
Fraud involves intentional deceit. For example, if someone borrowed money with no intention of paying it back.
While the debt collector can allege fraud, the debt collector would have to prove in court that a borrower was completely aware that their bank account would be empty on the day their loan repayment was due.
Real-world example: Passing a bad check is one example of fraud, so if you intentionally pay with a bad check, you could be at risk of arrest.
In most payday loan debt cases, borrowers just don’t realize how much the high interest rates and fees will add to the loan’s total cost.
Interest rates on some of these short-term 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 anticipated, and they cannot pay back the loan from their next paycheck. When they’re forced to roll over their loan into a new loan, they’re charged additional fees. That sets off a cycle of debt that’s difficult to escape.
In many cases, it’s illegal for collection agencies to threaten arrest
If you miss your payday loan’s due date, debt collectors don’t waste time. They start calling you — and often your friends or family — immediately. Many do so at all hours of the day and night, and it’s very stressful. Some will call you at work or threaten you. These threats may include jail.
The Fair Debt Collection Practices Act is a federal law that’s designed to protect consumers from abusive debt collectors. This act mandates that debt collectors can only contact you between the hours of 8 a.m. and 9 p.m. They’re not allowed to call you at work if your job prohibits personal calls, and they can’t harass you (or anyone you know) about the debt.
According to the CFPB, there are three things you can do if a collector threatens to have you arrested.
- File a report with your state’s attorney general. If you don’t know who your state attorney general is, visit naag.org or call 202-326-6000.
- File a report with your state regulator. The CFPB has compiled a list of each state’s bank regulator and their contact information..
- File a report with the CFPB by filling out their online form or call 855-411-2372.
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. Try contacting a payday loan relief company to assist with this step.
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.
The bottom line
You won’t go to jail for failing to repay your payday loan. However, you could go to jail if you fail to appear in court if you get a court summons.
If you receive a summons and are unable to appear for any reason, do not ignore it. Call an attorney and seek advice on your next move.
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.
FAQs
Here are the four states with the most payday loan stores.
California: 2,451.
Texas: 1,652
Tennessee: 1,344
Mississippi: 1,100
Payday lenders usually ask for a post-dated check or authorization to withdraw from your bank account. They do this so they won’t have to wait for you to come and pay them: they simply deposit the check or make a withdrawal. If you don’t have the funds in your account you’ll be hit with steep fees from both the lender and the bank.
Your lender should also be able to produce a license number or other evidence of licensing. Don’t be afraid to ask. If they are legit they will be willing to prove it. If they aren’t willing to show a license, that’s a red flag and you should look closer.
