As payday loans are taken out by younger and higher income folks (see this recent article in Money), more questions are raised about how these loans are dealt with in bankruptcy. These companies operate by loaning money to folks and holding a persons written check to help guarantee that you will pay them. For example, if you borrow $500 from the company, when they give you the money, you will sign a contract and give them a written check for, say $550. If you come back later and pay them back the $550, then they will return the check to you. If you don’t pay them when promised, then the company will “run” the check through the bank, or deposit the check.
Clients most often are concerned that if they file bankruptcy on these loans, then the company will have them prosecuted for writing a “cold” or “bad” check, as it is often called in Kentucky. In Kentucky, it is a crime to write a check to a merchant for services or purchase of items, and then the check be dishonored. This is the crime of “theft by deception”. In other words, you have represented to that merchant or business that the money is in fact in your account when the check is written.
On the other hand, when a check is given to a payday or check advance type business to hold, that business in fact knows that there is no money in your account when you write the check. That is why they are holding the check for a period of time for you to come in and pay them and pick up the check.
And that is why you can not be prosecuted for a crime for filing bankruptcy on a debt or check written to a payday or check advance loan. These types of debt create a civil liability, and don’t usually result in criminal charges. Generally, payday or check advance type loans are dischargeable in bankruptcy.