A recent client asked that very question. His payday loan agreement specifically stated that he could not discharge the loan in bankruptcy. Contracts commonly state that a debt survives bankruptcy. Are those agreements valid?
Generally speaking, agreements to waive your right to file bankruptcy or to exclude a debt from bankruptcy are unenforceable and violate public policy.
Any attempt by a creditor in a private pre-bankruptcy agreement to opt out of the collective consequences of a debtor’s future bankruptcy filing is generally unenforceable. The Bankruptcy Code preempts the private right to contract around its essential provisions.” In re Pease, 195 B.R. 431, 434-35 (Bankr. D. Neb. 1996)
Terms in a contract that prohibit a person from filing bankruptcy are never enforceable. Agreements that certain debts cannot be included in bankruptcy are also void.
In larger business bankruptcy cases, there is limited authority for a creditor to negotiate away some of the bankruptcy protection against collateral securing a business loan, but that is limited to larger business bankruptcy cases typically involving single-asset entities. (For example, a corporation that owns a single apartment complex.)
“I CONFIRM AND PROMISE THAT I AM NOT CURRENTLY IN BANKRUPTCY PROCEEDINGS NOR AM I PLANNING ON FILING BANKRUPTCY IN THE FUTURE”
This provision is typically included in many payday loan agreements. Does it have any legal consequence? If you file bankruptcy after signing an agreement with this provision, does it mean you have committed fraud if you file a case?
First, if you are currently in a bankruptcy case and take out a payday loan, the debt is not discharged anyway since it was incurred after the case was filed.
What about the 2nd part of this statement–the part about not planning to file bankruptcy and then filing a case soon afterward?
Taking out a loan when you plan on filing bankruptcy is a bad idea. The creditor can object to discharging the debt if you knew you would be filing bankruptcy at the time the loan was made. However, many folks desperately take out loans so that they can avoid filing bankruptcy in the first place, so the timing of the loan is not always conclusive as to a person’s intent.
It seems like payday loans and bankruptcy go hand in hand. Such loans are the last stop before surrendering to the debts. It is a desperate and final effort to keep the cash flow going, and lenders know their customers are just a step away from declaring bankruptcy. For this reason they attempt to scare customers that filing bankruptcy after receiving a payday loan is fraud and that it cannot be discharged or that it is a crime to write a check with insufficient funds on deposit.
Can you contract away your right to file bankruptcy? The answer is a resounding No!
Image courtesy of Flickr and Steve Snodgrass.
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