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Trapped in Payday Loan Debt? How to Escape

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“Is it possible to get ahead of the payday loans and get credit back in good standing?” That question was posed to us in a recent CreditExperts Twitter chat we hosted. If you’ve ever been stuck in the cycle of payday lending you may be wondering the same thing.

The answer depends in large part on where you took out the loan.

If you borrowed from a lender who is a member of the Consumer Financial Services Association of America (CFSA) then you may be in luck. CFSA’s Best Practices guidelines allow a payday loan customer the option of entering into an Extended Payment Plan (EPP). With an EPP, you’ll have more time to repay the loan (usually four extra pay periods) without any additional fees or interest added for that service, and you won’t be turned over to collections as long as you don’t default on the EPP. (Note: Laws governing payday loans vary from state to state.)

However, to qualify, you must apply for the EPP no later than the last business day before the loan is due, and you must sign a new agreement. If you took out your loan through a storefront location, you’ll have to go back to that location to turn in your application. Amy Cantu, director of communications for CFSA, says that their association represents almost 9,000 storefront payday lenders in the U.S. “Some of our members do offer online loans, as well,” she notes.

In some states, EPPs are mandated under state law.

[Related Article: The First Thing You Must Do Before Paying Off Debt]

Where to Go After EPP

If an EPP isn’t an option, you may want to talk with a credit counseling agency. While credit counseling agencies help consumers in debt all day long, these kinds of loans can present unique challenges. “It’s not a traditional loan with set guidelines in terms of how they work with us,” explains Thomas Fox, community outreach director for Cambridge Credit Counseling.

He says that lenders who are members of the CFSA “seem to be more lenient” and are “more apt to try to work with people.” Those lenders will often “restructure to pay back (the balance) over 6-12 months when coming through our program.” But he also adds that only applies in about 40-50% of the payday debt situations with which clients are dealing. With the rest, he said, their agency will do their best to assist. Sometimes that means negotiating settlement of the debt and sometimes it just means reducing payments on other debts or finding more money in the budget so the payday loan can be paid off.

But some consumers with these types of loans just get themselves deeper into debt.

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The snowball effect

Just 14 percent of payday loan borrowers can afford to repay the average payday loan, according to research by the Pew Charitable Trusts. In its report, How Borrowers Choose and Repay Payday Loans, it found that “the average borrower can afford to pay $50 per two weeks to a payday lender — similar to the fee for renewing a typical payday or bank deposit advance loan –but only 14 percent can afford the more than $400 needed to pay off the full amount of these non-amortizing loans.”

It went on to warn that “administrative data show that 76 percent of loans are renewals or quick re-borrows while loan loss rates are only 3 percent.” Fox agrees these loans may pile up when consumers fall behind. “We’ve seen people¬†with 5 – 7 payday loans from the original loan. It’s loans stacked on top of a loan,” he notes.

And that’s also why for some borrowers the only other option to get out from under this kind of debt will be bankruptcy. “For the most part, payday loans aren’t treated any differently in bankruptcy than any other unsecured loan,” writes attorney Dana Wilkinson on the Bankruptcy Law Network blog.

Some consumers, however, have the mistaken impression that they can’t include payday loans in their bankruptcy. Or they worry they will be charged with fraud or arrested if they can’t pay one of these loans back or try to discharge them. One of the reasons that fear is so common is that payday loan debt collection scammers often make those kinds of threats, despite the fact that these actions are illegal.

Are you trapped in payday loan debt? Or have you found your way out? Share your story in the comments below.

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    Hello Gerri,How are you feeling this afternoon? Great I hope. I am feeling okay so far. Listen to this if I may request that if you/your organization would provide me with some items or materials on how to stop these payday loans scammers from making harassment phone calls to my place of employment and my personal/work related references as well. Are there any books to help me and other people as well?.Thanks.

  • http://www.credit.com/ Credit.com Credit Experts

    Hi, R.W. —
    We can’t provide individual counseling, but we can point you to resources to help you find the help you need. Here’s a post on how to find a credit counselor.
    How to Choose a Credit Counselor.
    Good luck to you.

  • http://www.Credit.com/ Gerri Detweiler

    It sounds like you are dealing with scammers. Check the statute of limitations. These debts may be too old for them to successfully sue you. But if they’re threatening you with filing criminal or civil papers there probably not legitimate anyway. Those are threats that debt collection scammers use. Read this:
    9 Signs You Are Talking to a Debt Collection Scammer

  • http://www.credit.com/ Credit.com Credit Experts

    Multiple reports on the same debt is not permitted. We wrote about it here: Credit Report Double Jeopardy Means Double Damage

  • jojowa

    write the credit reporting agency telling them it is over 7 years old. by law they have to remove it after 7 years

  • jojowa

    it is also past the statute of limitations. they can no longer collect on it

  • snapple

    I was wondering what kind of trouble I could get into if we are unable to pay back our payday loans. Our income is ssdi. We originally had 4 payday loans but one let us do an installment loan. We thought we could handle trying to pay things back but it has come to the point that everything else has to be let go because of the fees have changed and become super high from the time we had first taken out the loans. Everything can be directly taken out of our bank account if the payment isn’t made and that would be bad. But we are getting disconnect notices on our utilities because we were trying to keep these paid because we were afraid of going to jail because we were told if the amount was 500 or over it was a felony charge and all 3 are 500 or more each and the installment is 850 totaling at one time the amount we would have to pay over $4,000 so this is why we are so scared. But I have children and if we can’t pay rent or utilities we could lose them as well.. We have not missed any payments on the loans but its to the point that we can’t do it anymore and I know we did this to ourselves but we really need help on what to do. should we close out our bank account and see what happens with the companies and try to mediate with them or file bankruptcy I really need help I am stressing and feeling like there is no help and no end I cant see a light

    • http://www.Credit.com/ Gerri Detweiler

      It is not a crime to be unable to pay your debts. But it does sound like your bank account is at risk here. And our readers tell us that payday lenders can be very aggressive in their collection efforts.

      It would be a good idea for you to change your bank account so they no longer have access to your funds. It would also be a good idea for you to consult with a consumer bankruptcy attorney.

      Hang in there.

  • mitch13

    Are there any legitimate pay day loan consolidation companies?

  • Nancy

    Please help me.. Me to found my self on the Payday Loan express train.. and I cant seem to find a way out…

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