What happens if you fail to repay your payday loan debt? Will you face felony charges and run the risk of jail time? Is it considered a misdemeanor?
Don’t worry. Jail isn’t a legal punishment for defaulting on debts. And you won’t be arrested. However, an unpaid loan can make life difficult in many other ways, including lawsuits, court appearances, or wage garnishment.
Table of Contents
Our take
- Failure to repay any loan is not a criminal offense; it’s a civil matter
- That means it’s not a felony, and you won’t go to jail simply because you defaulted on your payday loan
- You can be sued for failing to repay a payday loan and could end up facing wage garnishment
- While a payday lender can’t directly garnish your wages, a judge can and will order wage garnishment
- If you’re sued and fail to appear in court, you could end up in jail
- In many cases, it’s illegal for debt collectors to threaten you with arrest
Stuck in payday debt?
DebtHammer may be able to help.
Disclaimer: The contents of this article are for informational purposes only and should not be construed as legal advice.
Can I be charged with a felony if I don’t repay a payday loan?
Failing to repay a payday loan is NOT a felony, and you will not go to jail.
Here’s why: Under U.S. law, a felony is a crime that merits a jail term of more than a year or the death penalty. Misdemeanors are offenses punishable by fines or short sentences in local jails. Both involve criminal charges, such as “aggravated assault,” “theft” or “driving while intoxicated.”
There are two types of offenses:
- Civil: Legal proceedings are between individuals (or organizations). One party sues the other for failing to perform their legal duty, like failing to fulfill the terms of a contract.
- Criminal: The dispute is between the government and an individual (or organization). Criminal charges are filed. You will face misdemeanor or felony charges depending on the severity of the crime; the government will attempt to prosecute you, and you could face jail time.
Civil offenses include breaking the speed limit, slander, and breach of contract (like failing to repay a loan). Fines and other court-mandated means of reparation (like wage garnishment) are the only legal punishments. People can’t go to jail for committing a civil offense. However, the plaintiff’s burden of proof is lower.
Criminal offenses are much more serious. They include felony and misdemeanor charges such as theft, prostitution, and homicide. An arrest warrant must be issued for criminal offenses, and many criminal charges could land you in jail.
Will I go to jail if I don’t repay a payday loan?
If you can’t repay a payday loan, your case will be heard in civil court, not criminal, according to Jeff Rose, a certified financial planner and founder of GoodFinancialCents.com.
“This means you can’t be arrested for not paying back the loan,” Rose said. “Lenders can take legal action against you, like suing for the owed amount. But no, they can’t have you thrown in jail.”
That said, an unpaid payday loan can make life difficult in many other ways.
Pro tip: It’s worth noting that a few types of debt could land you in jail if you fail to pay. These include child support, alimony and unpaid taxes. These could result in arrest, particularly if you fail to follow a court order.
What happens when you default on a payday loan?
If you skip paying your payday loan, there will be some ramifications.
Collection calls
Debt collectors will call you after a missed payment. These can be annoying, but there are rules they must follow that have been established by the Fair Debt Collection Practices Act. A court summons will likely be the next step if you don’t pay them.
Payday lenders can sue you
It’s important to understand that any creditor — including a payday lender — has the right to challenge you in court if you fail to make your payments or otherwise violate your loan agreement. This is also true if you fail to repay personal loans, credit card bills, medical bills and even some student loans. When you obtain a loan, you’re signing a legally binding contract. You’re violating the contract when you fail to make your payments as scheduled.
But even though lenders can sue you, they usually don’t want to. Court proceedings, even in a small-claims court, are expensive and time-consuming. Payday loans are generally less than $1,000. In many cases, court costs would be higher than what they’d collect through a judge’s order.
Because of this, payday loan companies would prefer to negotiate with you outside of court. This can help you avoid a costly and inconvenient court appearance. If your debt goes to collections, the debt collection agency is much more likely to sue you. That’s because debt collectors often purchase unpaid debts for pennies on the dollar, and it is much more cost-effective for a debt collector to turn to the courts, even for small loans.
Pro tip: Don’t ignore collection calls. If the debt is legitimately yours, try to negotiate a payment plan or tell the debt collector that you’re considering Chapter 7 bankruptcy. It may help keep you out of court.
According to a report from the American Civil Liberties Union, most cases on many state court dockets are debt-collection lawsuits. In many state courts, more lawsuits are filed by debt purchasers than any other type of plaintiff.
Your wages may be garnished
No matter what a debt collector tells you, payday lenders cannot directly garnish your wages. But they can sue you and request that a judge order wage garnishment. Before your wages are garnished, you should receive an order to appear in court. If you show up at your scheduled court hearing, you may be able to avoid a wage garnishment order.
If a judge orders wage garnishment, the amount will be limited. Creditors will only garnish disposable income. Wages can’t be garnished to the extent that borrowers don’t have enough money to live on.
Can a payday lender garnish Social Security?
Courts cannot garnish Social Security benefits to repay payday loans, but they could be garnished for certain types of debt. Section 459 of the Social Security Act (42 U.S.C. 659) permits Social Security to withhold current and continuing Social Security payments to enforce legal obligations to pay child support, alimony or restitution.
Can Venmo, CashApp or Paypal be garnished?
Paypal, Venmo and CashApp are mobile payment services that allow users to send and receive money electronically.
Various state laws complicate whether or not these accounts can be garnished. When creditors enforce judgments, they typically search for wages, property, and checking accounts. Some states allow all three to be garnished, some only permit access to one, and some don’t allow access to any. If you’re being threatened with wage garnishment, you should check your state’s laws.
The key is whether your creditor or debt collector knows that you have these accounts. Typically, they will not be aware of these accounts unless you’ve disclosed the information or they appear on your credit reports (for example, if you have financed items through Paypal’s Pay in Four plan, it will appear on your credit reports as an account from Synchrony Bank).
Review your credit reports to see if they’re mentioned (you can get free credit reports at annualcreditreport.com). If you’re worried, unlinking these accounts from your checking account — or closing them altogether — is best.
How wage garnishment works
There are two forms of garnishment:
| Wage garnishment | Bank garnishment |
| A judge orders your employer to withhold a portion of your paycheck to repay your debts. | The judge orders your bank or credit union to debit a specified amount of money from your checking account to repay the debt. |
According to the Consumer Financial Protection Bureau (CFPB), some states have limits or “exemptions” that apply to bank and wage garnishments, usually to ensure you have something left to live on.
Wage garnishment is often ordered to repay:
- Consumer loans and credit card debt
- Tax and medical debts
- Alimony and child support
Pro tip: A payday lender or debt collector may threaten wage garnishment even if they don’t have a court order. Contact a local legal aid group or your state attorney general’s office if this happens.
Can I be arrested for defaulting on a loan?
No, you won’t be arrested simply for failing to repay a loan, but there could be other reasons for an arrest.
There are two primary reasons many borrowers are concerned about going to jail for not paying back their payday loans.
The first is that predatory lenders continue to threaten people with arrests despite federal laws against it. Unfortunately, many borrowers believe the threats.
The second reason is that arrests sometimes do happen. But these arrests are not for failure to repay a loan. It’s for other reasons, like failing to appear in court.
In 2016, Paul Aker was arrested by U.S. marshals over a 29-year-old student loan for $1,500. Seven people in combat gear appeared at his home to take him to jail. Aker was held in jail for an hour before appearing before a judge.
But Aker wasn’t arrested over the loan itself. He had failed to appear in court.
“Since November 2012, U.S. Marshals had made several attempts to serve a show cause order to Paul Aker to appear in federal court, including searching at numerous known addresses,” the Marshals Service said in a statement emailed to CBS MoneyWatch. “Marshals spoke with Aker by phone and requested he appear in court, but Aker refused.”
Your lender could file “hot check” charges
In some cases in Texas, arrest warrants were issued because the payday lender filed “hot check” charges. In Texas, passing a bad check is a Class B misdemeanor.
In a typical “hot check” case, someone writes a paper check they are fully aware will bounce in order to purchase an item without paying.
But Texas law clearly specifies that checks written to secure a payday loan aren’t considered “hot checks” because if the check bounces when the loan comes due, it’s assumed that borrowers can’t afford to repay their loan. They never intended to defraud the lender.
Don’t ignore a summons to appear in court
The ACLU report says that over 95% of debt collection lawsuits end in favor of the collector, usually because the accused debtor either fails to appear in court or doesn’t prepare a defense. The report said that in many cases, defendants were unaware they had been sued.
Pro tip: If a payday lender or a collections agency sues you for failing to repay a payday loan, you must show up to court. People who miss their court dates risk arrest for ignoring an official court summons.
Conversely, showing up to the court proceedings might surprise the lender. Many expect the borrower to skip out on their court appearance.
If they’re not prepared to prove a breach of contract, the court may dismiss the case. That could clear your debt or save you from wage garnishment.
READ MORE: What happens if you close your bank account and default on your payday loan
Real-world example
Mike defaulted on a payday loan, then started a new career in a different field and relocated for a new job. After securing the new job, he contacted his lender to negotiate a settlement, but the lender refused.
When Mike started his latest job, he learned his wages were garnished. Because his lender did not have the new address, he did not receive a court summons and had no idea he was being sued or that wage garnishment had been ordered. In the meantime, Mike’s credit score was also severely damaged.
Pro tip: Since wage garnishment means the lender will be repaid the entire loan amount, plus additional fees and interest that compounded over the years, the payday lender had no incentive to settle. Mike’s only remaining options are to repay the loan in full through the wage garnishment order or to file for bankruptcy. For the latter, he would have to pay a bankruptcy lawyer, which may cost more than the original loan.
This is an excellent example of why it’s essential to notify your lender if you relocate and why you must always appear on your scheduled court date. Don’t believe your payday loan lender will drop the issue because they no longer have your address.
READ MORE: Payday loan debt settlement
Pro tip: If you’re being threatened with a lawsuit, now is the time to contact a debt settlement company or to attempt to negotiate a repayment plan on your own. Do not wait until you’ve gotten an order to appear in court. At that point, the lender has no incentive to negotiate a settlement. If a judge orders wage garnishment, your options are narrowed to repaying your debt in full (either through the garnishment or in a lump sum) or filing for bankruptcy.
Has the statute of limitations expired?
A statute of limitations is a state law restricting how long someone may sue for damages they’ve suffered. Therefore, a statute of limitations on debt is when a creditor or debt collector must sue a borrower for defaulting on their account. The number of years varies by state but ranges from three to ten years.
This means that in some states, like North Carolina, payday lenders can’t sue you to collect unpaid payday loans after three years, but in other states, like Iowa and Kentucky, you can be sued for unpaid payday loans for up to ten years. Unpaid loans will still appear on your credit reports, even if your state’s statute of limitations has expired.
If you’re being threatened with a lawsuit, check the statutes of limitations on your debt and don’t hesitate to consult a lawyer for legal advice. Many law firms offer free consultations.
READ MORE: Statutes of limitations on debt for each state
Can I sue a payday lender?
Yes. Under the Fair Debt Collection Practices Act (FDCPA), it’s illegal for a lender to threaten you with arrest. If this happens, you can sue (or countersue) the lender. You will need proof that they’re breaking the law. It can help you get your loan forgiven and discourage predatory lending practices.
More debt relief options
The simplest way to avoid arrest threats, court appearances and wage garnishment is to get your debt under control. In the case of payday loans, you have a few options:
- Payday loan consolidation programs
- Payday Alternative Loans
- Debt consolidation loans
- Credit counseling
- Debt settlement
READ MORE: How to get out of payday loan debt in eight easy steps
The bottom line
Payday loans are incredibly difficult to repay, and the short loan term and high interest rates make repayment difficult. But defaulting on a payday loan is not a felony and will not land you in jail. That said, you could appear in court, where a judge could order wage garnishment.
It’s essential to contact your lender as soon as you realize you can’t repay your loan as scheduled. If you’re proactive, they’ll be more likely to work with you, and you can ward off a potential lawsuit.
Additional references:
New York Times: Viral student loan nightmare is not what it seems, authorities say
https://www.consumerfinance.gov/ask-cfpb/how-do-i-find-my-states-bank-regulator-en-1637/
