Many people are attracted to short term loans because of their quick and easy money appeal. However, title and payday loans can carry some steep consequences for default. Besides having larger than average interest rates and the possibility of asset seizure, they can be quite tricky to manage in bankruptcy.
Since short term loans carry high interest rates defaulting on the loan can leave the borrower with a large debt burden in fees on top of what is owed on the loan. Title loans are more complicated as they hold an asset as collateral on the loan. Defaulting on the loan can quickly lead to asset seizure and liquidation. Although bankruptcy can protect most assets, the debtor must file for bankruptcy before the asset is taken. Most payday loans are considered to be unsecured debts, which means that they may qualify for a bankruptcy discharge. However, timing is very important when dealing with short term loan debts.
Further, most payday or title loan lenders require a postdated check or direct access to a bank account in order to process the loan. This means that once the loan payment is missed, the lender can access the debtor’s funds directly to attempt to collect on the debt. Once a lender is given direct access to a bank account it can be difficult to halt collection efforts, even with the help of bankruptcy. The reason is that the time it takes to file for bankruptcy could be too late to stop the creditor from seizing funds. There is no guarantee that a bankruptcy court would order any garnished wages to be returned and the debtor would most likely end up losing that money to the creditor.