Can You Discharge Cash Advances in Bankruptcy?

Millions of Americans rely on cash advances to help tide them over until their next paycheck. Cash advances tend to have ridiculously high interest rates, and even one or two advances can cause intense financial distress. One common question is whether a debtor can discharge (eliminate) cash advances in bankruptcy. The answer is generally “yes,” you can. But there are special rules for recent cash advances, which ourLos Angeles bankruptcy lawyer discusses in this article.

Why Cash Advances Are Risky

Many people get a cash advance off their credit card, usually at the ATM. The interest rate is often 40% or more for this type of loan, and there usually isn’t any grace period, either. Interest starts piling up from the second you fold the bills into your wallet.

Other debtors get a cash advance at a payday lender. Essentially, a debtor brings a copy of their pay stub, and they get a loan which is due when they receive their next paycheck, often within 1-2 weeks. These places also have very high interest rates and fees. TheAPR for a payday loan could approach 400%. Some payday lenders are under investigation by the government for questionable practices.

Most people turn to cash advances because they are trying to plug a short-term cash hole. They need groceries or medicine and have no ability to pay for it. Nonetheless, the fees and interest rates are so high that they are often paying back even one cash advance for years—and never feel like they are getting ahead. Some debtors end up having to take on new debt just to keep their chin above water.

Cash Advances Are a Dischargeable Type of Debt

The bankruptcy code lays out certain categories of debts that are not dischargeable. For example, a child support obligation is the type of unsecured debt that should be eligible for discharge. But Congress decided that it didn’t want people to be able to eliminate that debt, so it created an exception.

Most cash advances will be eligible for discharge, just like credit cards. In a Chapter 7, you can wipe them out quickly, in a matter of a few months. If you take the more scenic Chapter 13 route, then you can also include them in your repayment plan.

Filing for bankruptcy will also protect you from any collection activity. That’s comforting news. Some lenders are very aggressive about trying to get debtors to repay what they owe. Some of them call all night and even stop by to harass debtors at home. Once you file for bankruptcy, the automatic stay will prevent any type of collection activity, even phone calls.

What About Recent Cash Advances?

Although cash advances are generally dischargeable, not all of them are. Congress was worried about people taking out a quick cash advance and then immediately filing for bankruptcy. So the bankruptcy code treats recent cash advances differently.

Under Section 523(a)(2)(C)(i)(II), cash advances totaling $750 or more are presumed nondischargeable if incurred within 70 days of filing for bankruptcy. Let’s say you file for bankruptcy on July 1. Any cash advance in the 70-day window preceding your filing date will be “presumed” nondischargeable. The bankruptcy will not eliminate that debt.

If you take out cash advances, then you typically need to wait at least 70 days before you file. That’s the safe course of action. Look at all your debts, including cash advances and payday loans. Did you take any within 70 days? If so, you should probably wait to file.

Of course, even some advances in the 70-day window can be discharged. The rule merely “presumes” that the debt is non-dischargeable. You might convince a judge that you had a legitimate reason for taking out the advance. Still, it’s best not to bother. Waiting 70 days shouldn’t be too burdensome.

Fraudulent Debts Are Not Eligible for Discharge

Furthermore, no debt is dischargeable if you were motivated by fraud when you took it. Essentially, this means you took out the debt without any intent whatsoever of paying it back. There is no “look back” period when it comes to fraud of this sort. You can’t load up on debt, wait 70 days, and then file. Your bankruptcy judge might ultimately not let you discharge any of that debt.

If a creditor wants to object to any debt, they will have to start an adversary proceeding within bankruptcy. They will need to convince the bankruptcy judge that you committed fraud when you took out debt before filing for bankruptcy.

Adversary proceedings are expensive, and few creditors start them. Nonetheless, there is no reason to give anyone reason to suspect you took out debt without an intent to repay.

Weaning Yourself Off Payday Loans and Cash Advances

You only get to file Chapter 7 bankruptcy once every 8 years. If you are still feeling the financial pinch, then you need to take steps so you don’t end up back in debt or hooked on cash advances:

Find a side gig. Drive for Uber, bag groceries, or do yard work for someone in the neighborhood. Increasing your income is really the only way to reduce financial stress. Once you have enough money coming in each month, you can stop getting cash advances to tide you over.