Although taking out a payday loan may seem like a quick solution to a temporary cash shortfall, it often sends borrowers deeper into debt. In fact, the Consumer Financial Protection Bureau (CFPB) reported that over a 14-day period, 80% of borrowers have to roll over their payday loan or apply for another loan to cover the original payday loan. That means only 20% of borrowers actually have the money to pay back their loan as scheduled on their next payday.
So, what happens if you find yourself among the 80% of borrowers who can’t afford to pay back their payday loans? Will you face jail time?
In short, no. You won’t go to jail for failing to repay your payday loan. However, that doesn’t mean you’re in the clear. You could still go to jail for other reasons.
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Criminal vs. Civil Offenses: What’s the Difference?
There are two types of offenses:
- Civil: These are legal proceedings between individuals or organizations. One party sues another for failing to perform a legal duty. 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.
- Criminal: These disputes are between the government and individuals or organizations and are heard in criminal court. The government seeks punishment for committing either a misdemeanor or felony. Common punishments in criminal cases usually involve fines, incarceration and, in some cases, acts of restitution.
Not paying a debt is a civil offense that falls under breach of contract. No matter what a payday lender or debt collector tries to tell you, when a borrower is convicted for breach of contract, the punishment will never involve jail time. Lenders can only take you to civil court, and U.S. courts can only order jail time for criminal offenses.
What Does the Law Say About Being Jailed for Not Repaying Debts?
The Consumer Financial Protection Bureau, which is responsible for regulating payday lending at the federal level, is very clear: “No, you cannot be arrested for defaulting on a payday loan.”
In fact, 28 U.S. Code § 2007, “Imprisonment for debt,” states that the federal government leaves the imprisonment for debts up to each state. A total of 41 states have language in their state constitutions prohibiting an individual’s jailing for not repaying a debt. The nine states that do not have this clause are Connecticut, Delaware, Louisiana, Maine, Massachusetts, New Hampshire, New York, Virginia and West Virginia.
Although there are no laws to stop imprisonment for debt in the U.S. states, it is still highly unlikely that a person would face jail time when they fail to come up with the money to pay back their payday loan. According to The Wall Street Journal, most jail sentences stem not from the failure to repay the debt but are instead from failure to appear in court or for not following a court’s ruling on your case.
States Where You Can — And Can’t — Go to Jail for Debt
If you owe large amounts of unmanageable debt, the last thing you want to worry about is going to jail. Debt collectors often threaten jail time as a tactic to try to get you to pay. However, you won’t go to jail for not paying consumer debt — this includes credit cards, mortgage loans, payday loans, medical bills, and student loans. Nor will you be arrested or required to do court-ordered community service.
That’s not to say jail time is completely avoidable, though. If you have an unpaid debt, a creditor could initiate a lawsuit against you in civil court, particularly if you take deliberate action like closing your bank account. If you receive a court-mandated order or summons and fail to show up, you could go to jail for contempt of court. Because of this, it’s important to respond promptly and pay any court-ordered fines as soon as possible.
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:
- New Mexico
- North Dakota
- South Dakota
- West Virginia
However, the following 26 states could issue an arrest for contempt of court:
- Rhode Island
It’s important to note that you can go to jail in many states for failure to repay certain types of debt, including child support and unpaid taxes. Both of these can result in jail time, particularly if you fail to follow a court order.
READ MORE: Can payday lenders garnish wages?
Failure to Repay Payday Loan Debt is Not Fraud
One way creditors and debt collection agencies try to intimidate borrowers is by claiming the borrower committed fraud, which is a criminal offense. A person can face criminal charges in a court of law if they commit fraud; however, taking out a payday loan and then not being able to pay it back is not a fraud.
“Failure to pay back a loan is not necessarily fraud,” says Ben Michael, a criminal defense attorney at Austin-based Michael & Associates.
Fraud occurs when a person knowingly takes out a loan without intention of paying it back. It’s a form of deceit. In addition to having to prove this was the borrower’s intent in a court of law, the debt collector would also have to prove that the borrower was fully aware that their bank account would be empty a week after the loan, when the repayment was due to be collected. Passing a bad check would be one example of fraud.
In most payday loan debt cases, a borrower simply doesn’t realize how much the high interest rates and fees add to the total cost of the payday loan.
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. When they’re forced to roll over their loan into a new loan, that leads to additional fees. That starts a cycle of debt that’s difficult to escape.
READ MORE: Payday loan interest rates
In Fact, In Most Cases, It’s Illegal for Collectors to Even Threaten Jail
Debt collectors don’t waste any time when a borrower doesn’t repay their payday loan by the due date. They often begin calling the borrower — and sometimes their friends or family — right away. Many do so at all hours of the day and night. This can be very stressful for the borrower, who wants to repay their loan, but just can’t afford it. Some debt collectors even resort to calling you at work or making threats to get you to pay. These threats may include having you arrested.
The Federal Trade Commission has enacted the Fair Debt Collection Practices Act, which is a federal law designed to protect consumers against abuse by debt collectors. This law states that debt collectors can only attempt to contact you between the hours of 8 a.m. and 9 p.m. They also can’t call you at work if our job prohibits outside communication, nor can they 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, you can find his or her information by contacting the National Association of Attorneys General by visiting naag.org or by calling 202-326-6000.
- File a report with your state regulator. The CFPB has a list of each state’s bank regulator and their contact information on their website.
- File a report with the CFPB by calling 855-411-2372 or by filling out their online form.
However, Ignoring Court Orders Can Lead to Arrests
The CFPB states that “if you are sued or a court judgment has been entered against you and you ignore a court order to appear, a judge may issue a warrant for your arrest.” Your jail time would result from not cooperating with the courts, not the fact that you owe a debt.
While you may be tempted to ignore a court summons, DO NOT DO THIS. Appearing in court is intimidating and inconvenient and may cause you to have to miss work, but if you fail to appear, not only will jail be on the table, but a judge could order wage garnishment.
There are a few things you can do to avoid jail time.
- Contact the payday loan lender and negotiate for better terms or an extended payment plan. This shows you want to repay the loan, and in many cases, the lender would rather settle for a smaller payment over a longer period of time than no money at all.
- Reach out to a bankruptcy attorney to go over your finances and see if filing Chapter 7 or Chapter 13 bankruptcy is advisable. Both of these filings cover payday loans.
- Seek advice from a credit counselor. A credit counselor may be able to consolidate your debts, provide you with a smaller interest rate and offer you better repayment terms.
- Attend all court proceedings. If you can, consult with an attorney. The attorney may be able to intervene and get the lender to agree to a new repayment plan that you can actually afford. Many attorneys offer a free initial consultation.
- Abide by all court rulings.
READ MORE: Can a payday loan company sue you?
What About the Horror Stories?
Debt collectors will often stoop to low levels to coax a payment out of a borrower. CNN Money reported on several collection agencies that used such scare and intimidation tactics as threatening jail time and sending Child Protective Services to the home. The online news magazine also revealed that one collection agency went as far as to threaten to kill a debtor’s dog.
After investigating, CNBC found that most borrowers are busy working multiple jobs and trying to juggle child care. When a borrower can’t attend one of their court hearings for an unpaid debt, the debt collectors go straight to pursuing an arrest warrant. In many cases, an arrest warrant is issued.
Fortunately, the American Civil Liberties Union (ACLU) is committed to abolishing jail time for individuals who owe a debt. They are dedicated to uncovering the unjust practices of debt collectors and pleading with the courts to establish fair laws regarding debt.
Stuck in the Payday Loan Debt Trap? Here are Some Options
Here are a few ways to help you get off to a fresh start.
- Personal loan
- Balance transfer credit card
- Credit counseling
- Debt settlement
- Debt consolidation
- Talk to a bankruptcy lawyer
The Bottom Line
You cannot go to jail for failing to repay a payday loan. You can, however, be sentenced to jail if you miss a court appearance or ignore a court summons. Be proactive and ensure you’re there and fully prepared for any court challenge. Better still, work with your lender first to avoid any court summons in the first place.
Attorney fees will usually depend on the complexity of your case. They will charge you based on the scope of work, amount of debt owed, and difficulty of settlement. The good news is that most law firms offer a free initial consultation, which is particularly useful if you need advice about how to deal with a court summons or you’re wondering if bankruptcy is right for you. Read more about the costs associated with filing for bankruptcy.
The main difference is the loan amounts. While payday loans are small sums of money ranging from $100-$1,500, installment loans allow for higher loan amounts that can go as high as several thousand dollars. A payday loan generally doesn’t require a credit check, while your credit score will matter if you apply for an installment loan.
Confirm the information with your state regulator or attorney general to learn whether a payday lender is licensed to do business in your state.
Many states don’t allow payday lending, and some states that do allow payday lending require lenders to be licensed. In some states, if a payday loan is made by a business that isn’t licensed in your state, the payday loan may be invalidated.
If this happens, the lender may not be able to collect or require you to repay your payday loan.
It’s complicated, but it may. Payday loan requirements are notoriously lenient. All you usually need is proof of income, employment and a post-dated check. While payday lenders don’t usually check credit reports or report loan payments to the three major credit bureaus, if your loan is handed off to collections, that will be reported to the credit bureaus and will hurt your credit score.