There have been many reports about people owing payday loans going to jail. According to a CBS news article, having a payday loan of less than $1,000 could land you in jail. But how could this happen if the United States federal law has outlawed debtor’s prison way back in 1833? If we go by this federal law, no one can be imprisoned in the United States for their inability to pay a debt. However, more and more people who owe payday loans are finding themselves issued with an arrest warrant.
Can you really go to jail for not paying a payday loan? What can cause you to be arrested? Are there ways to avoid being arrested for a payday loan? This article will discuss answers to questions about the possibility of going to jail over an unpaid payday loan.
What Happens if You Default on a Payday Loan?
You are tight on cash and you badly need the money ASAP. However, your next payday is still a couple of weeks away. If you don’t have any credit card or if you have bad credit, one of the easiest options that is available to you is to get a payday loan.
A payday loan is a short-term high interest loan. You usually have around 14 days to pay back the money you borrowed and because of this short period, the interest rates or also known as annual percentage rate (APR) are also sky-high. The national average of APR for payday loans is at 391% but some states like Utah, Nevada, Texas, Virginia, Idaho, and Ohio have interest rates of more than 600%.
Because of the high interest rates, many payday loan borrowers are unable to pay back their loan and the only choice is to “roll-over” their loan which involves paying a fee to extend the repayment period. This could lead to a debt cycle where the original amount is topped off by fees and interest and you could eventually find yourself unable to pay back the money you owe.
Non-payment of the loan leads to a loan default. When you default on a loan, you will be charged additional fees, plus, if the payday lender has your check, they can repeatedly cash it which could lead to bank overdraft fees if your account is empty. Again, this just adds up to your debt.
Typically, the payday lender will attempt to collect the money from you for 60 days. If after this period, you have not managed to pay back the amount, they can turn over your debt to a debt collections agency.
A debt collector will then give you calls or send you messages for you to pay back your debt. If they are unsuccessful, they could take you to court to recover the payments.
Can Online Payday Loans Take Me to Court?
The answer is YES. A payday lender, online or traditional, can take you to court. If you default on your loan, they can file a debt collection lawsuit to get a judgment from the courts to legally force you to pay the money.
Even if you only have a small amount of debt, payday lenders utilize the small-claims court system to recover money from their borrowers who defaulted on their payday loans. According to a report released by the Consumer Federation of America (CFA), 68% of small-claims court hearings were dominated by high-cost lenders trying to recover debts from borrowers.
When a debt collection lawsuit is opened against you, you will receive a court summons indicating what the complaint is all about. If you receive this, do not ignore it. You have to respond to the summons either by admitting it, denying it, or saying that you lack knowledge. You can check our step-by-step guide on how to respond to a summons by yourself.
After you file your response, you will be provided information on what to do next. You will be given court dates on when to appear in court or there will also be instances when you will be asked to first try to settle the complaint out of court. Either way, you have to participate in the proceedings to avoid getting a default judgment. A default judgment happens when you don’t respond and you don’t appear in court so the judge automatically awards the judgment to the creditor.
Take note that the payday loan lender has to win a judgment before they can take action. They can either try to recover the money you owe by levying your bank account or by garnishing your wages.
Can I Go to Jail for an Unpaid Payday Loan? Can I Get Arrested?
Technically, you cannot go to jail due to an unpaid payday loan or for any kind of debt. According to the Consumer Financial Protection Bureau, you cannot get arrested for not paying a payday loan. Not paying a payday loan is not a felony. Because of this, many borrowers are often dumbfounded when they receive a warrant of arrest. So how does this happen?
As mentioned in the earlier section, many high-cost payday lenders sue debtors in small-claims courts. According to the same CFA report cited earlier, payday lenders use the small-claims court as a “debt-to-jail” pipeline to alarm and extract money from borrowers.
When you don’t appear in court, the lenders will use this non-appearance to obtain an arrest warrant for “contempt of court”. The excuse made by payday lenders is that they are not asking you to be arrested because of your debt, but because you ignored the court summons.
In short, YES you can be arrested and could go to jail if you have an unpaid payday loan BUT NOT because of your debt. The warrant of arrest could be obtained by the creditor due to your non-appearance in court or contempt of court, and not because you owe money.
If you get arrested, you could be put in jail for a few hours to a few days. You will only be released if you promise to appear in court or if you pay bail money. In Utah, there is a law that allows bail money to be paid to a judgment creditor. Because of this law, many payday lenders in Utah are aggressive in obtaining warrants of arrest. It was estimated that small-claim judges issue bench warrants for over three thousand high cost borrowers per year in Utah.
What to Do if a Collector Threatens to Have Me Arrested?
If you have an unpaid payday loan, it is natural to be worried about the possibility of being arrested. If you are receiving non-stop threats from debt collectors and being harassed, you can actually take some steps to prevent this or stop the threats altogether.
There is a law in the United States called the Fair Debt Collection Practices Act designed to protect you as a consumer from debt collectors. According to the law, the debt collectors cannot abuse you, harass you, show up in your place of work, or tell other people about your debt.
1. If You are Receiving Endless Threats and Experiencing Abuse from Debt Collectors, File a Report with Your State Attorney General, State Regulator, or CFPB
- National Association of Attorneys General – Visit naag.org or call 202-326-6000
- To find your State regulator, visit the CFPB webpage here
- Consumer Financial protection Bureau – Call 855-411-2372 or by fill out their online form
2. Check Whether a Complaint was Filed Against You
Even if you receive endless threats from a debt collector that they will put you in jail, the only way this could be possible is if they file a complaint against you in court.
After filing a complaint, you should receive summons from the court that you are being sued for your debts (also known as “being served”). If you have not been served, and you are unsure whether there is an ongoing lawsuit, you can call your local clerk’s office to find out information whether there is a complaint against you.
3. Do Not Ignore Court Summons
If you receive summons from the court, never ignore it. This is the easiest way for your creditor to get an arrest warrant. If you ignore the summons and do not respond, the creditors will most likely get a default judgment in their favor and they can also try to obtain an arrest warrant if you do not appear in court.
4. When Appearing in Court, Make Sure You Appear Before the Judge
In a small-claims court, you are not required to have a lawyer and because of this, many debtors who are unfamiliar with the system don’t know what to do. There are instances when debtors become confused and end up being marked absent from court even if they were present.
In an article published by non-profit news site ProPublica, they cited an incident wherein debtors were asked to meet with a representative of the payday lender after arriving in the courthouse. A man with his wife left after talking to the payday lender representative thinking they already fulfilled their obligation. An hour later, they were marked absent when their case was heard before a judge. This non-appearance led to another warrant of arrest being granted and weeks later, a constable appeared to arrest the man for missing the court date.
This is a clear example of why you should never leave the courthouse unless you have appeared in front of the judge. If you are directed to a representative of the payday lender, this could be a way for you to reach a settlement or payday loan debt assistance but even if you reach a settlement with this person, do not leave the courthouse unless you are sure that the case will not push through and you have been put in front of the judge. Take note that the creditor may not volunteer the information for you to enter the court because if you don’t appear, that will be to their advantage.
Stop Paying Payday Loans Legally
There are different ways to stop paying payday loans legally. If a judgment was reached after a complaint, you can get out of paying a payday loan judgment if all the monies that you are receiving are exempt from judgment. These exemptions will depend on the state you live in.
You can also ask the payday loan lender for a settlement or ask for an installment repayment plan so you can pay back the loan in manageable amounts, without the high interest rates. As a last resort, you can also file for Chapter 7 bankruptcy to discharge your payday loan debts.
Aidan has been writing about personal finance for over 6 years. Prior to this, he worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He is a CFA charterholder.
