Payday Loan Debt Settlement Strategies

Need a Debt Settlement Loan? Instead of Another Loan, Negotiate a Deal Instead

Need a payday loan debt settlement strategy? You are not alone. As of 2010, storefront and Internet-based payday lenders generated $40.3 billion in loans and about $7.4 billion in revenue for these lenders. Lately, industry has seen a shift from storefront lenders, which are subject to state laws, to Internet lenders based on Indian reservations or off-shore banks, which are not regulated.

Internet loans, in particular, are geared to what consumer advocates call the "payday loan trap" where borrowers are encouraged to take out a second loan to repay the first, which creates a larger debt. What makes payday loans insidious is the borrower must give the lender access to their bank account as a condition of receiving the loan. This allows unscrupulous payday lenders to withdraw more than the borrower thought they agreed to. Also, if the borrower has insufficient funds in the account to pay the lender, the borrower is hit with multiple non-sufficient funds (NSF) fees, which range from $20 to $35 per occurrence.

Settlements in General

In a customary business relationship, a buyer pays for a product on delivery. Buying groceries at the local market is typical. The customer pays for what the checker scans. More complex transactions are similar. A homeowner pays a housepainter the total amount agreed in the contract when the job is done. If the paint job is slap-dash, the homeowner withholds payment until the job is right. The buyer and seller share a balance of power in most transactions.

Typical debt settlements negotiations on an unsecured debt follow a familiar script:

1. Consumer stops making monthly payments
2. Consumer starts saving all he or she can in a separate bank account
3. Lender takes steps to collect the debt, and may threaten legal action
4. Consumer starts negotiations to reach lump-sum deal to resolve/settle the debt
5. Lender and Consumer reach deal for less than full balance due (typically 40 to 60 cents on the dollar).

This script is a time-honored way of resolving debt disputes, and is called an "accord and satisfaction" in the legal community. Notice the relatively balanced amount of power shared by the Consumer and Lender. The Consumer withholds payment as leverage. The Lender uses a real or implied threat of a breach of contract lawsuit as its leverage.

In a debt settlement plan, which is commonly but incorrectly called debt consolidation, a debt settlement company is the go-between for consumers and lenders and negotiates deals to resolve the consumer’s debts for less than the total balance due.

Payday Loan Debt Settlements

Payday loans do not have the same balance of power. Because borrowers give lenders the right to make deposits and withdrawals from the borrower’s account, the table is tilted in the payday lender’s favor. If the borrower opens an account at the same bank or credit union, the institution oftentimes links the two accounts and a withdrawal request from account A will result in a withdrawal from account B. Also, closing the account unilaterally will not accomplish anything because the bank or credit union will oftentimes reopen the account and start charging the customer NSF fees. Banks will leave reopened accounts open until all fees are paid.

So what can you do if you are a distressed payday borrower? You can take several steps to level the table.

Consult with your state regulator of payday loans to learn your rights. See Bills.com’s Payday Loan State Information page to learn more about your state’s laws for payday loans. For example, Alaska, Florida, Illinois, Michigan, Nevada, Oklahoma and Washington require payday lenders to offer extended repayment plans. If your state is not on that list, follow-through on our state information page to learn your rights.

If you live in one of the states that requires lenders to offer payment plans, then work with your lender to get started on such a plan. If you lender does not wish to work with you on a plan, contact your state’s payday regulator to get help in convincing the lender to comply with your state’s laws.

If you have an Internet payday loan, or live in a state without an extended repayment plan, then you need to take more drastic action.

Your first set of actions is to take control of your account the payday lender is accessing. You have the right under the Electronic Funds Act (EFTA at 15 U.S.C. 1693a(9)) to stop payment on a specific withdrawal and to revoke authorization for all future withdrawals by a lender. If you want to stop the lender from accessing your account, go to your bank or credit union at least three business days before the next transaction will take place. Explain you want to revoke the authorization. You will probably be asked to write a written confirmation of the stop payment order. You must also write a letter to the lender explaining you wish to withdraw authorization. (Keep a copy of the confirmation to the bank and a copy of the letter you send to the lender.)

Under payday industry rules, which are voluntary, online payday lenders must disclose your rights to revoke authorization, and explain how to do so.

Now What?

After you get control of your bank or credit union account and have revoked the authorization for the lender to access your account, now is the time to open a negotiation with the payday lender to reach a settlement for the account. This may prove difficult. Professional debt settlement companies do not, as a policy, accept payday loans in debt settlement programs. This is because payday lenders have reputations as being unwilling to negotiation reasonably, and for piling on penalty fees at eye-popping rates. When faced with an unreasonable negotiator, your only weapons are words and offers of settling the account for an amount you can afford.

See the Bills.com article Debt Negotiation and Settlement to learn more about the skills needed to negotiate a debt.