Payday Loan Debt Collection: Can They Sue You?

Whether signed in a storefront or over the Internet, a loan contract must conform to state law.

The payday lending business extends short-term loans to borrowers struggling with debts and a poor credit rating. Without other sources of credit, customers turn over a post-dated check, and agree to sky-high annual interest rates, as well as fees that keep piling up if they need to extend or roll over the loan. If the borrower fails to pay, he may be subject to collections actions and a lawsuit -- but the latter action depends on lending laws in his state.

Defaulting on a Payday Loan

When you take out a payday loan, you sign an agreement to the lender's terms. This includes the due date, the principal and interest, and the amount of any fees the lender will charge for late payments, rollovers, and other services. Normally, borrowers provide the lender with access to their bank account, so their check can be cashed or their account funds electronically debited to pay the loan.

State Regulations on Payday Lending

Some states effectively ban payday lending by restricting the amount of interest a borrower can charge on a loan, and including any fees or service charges as part of that calculation. Since a payday loan typically runs up interest to several hundred percent on an annual basis, states including New Jersey and Maryland that set a much lower ceiling effectively bar the business altogether. Although payday lending has also moved online, state restrictions on interest also apply to loans secured over the Internet.

Laws Governing Debt Claims

State laws govern written contracts, including those drawn up for a loan. In theory, a default on a payday loan could prompt a lender to file a civil claim against the borrower. Since most payday loans are for less than $1,000, the borrower in most counties would file the action in small-claims court, and include any filing fees or other costs with the amount demanded from the defendant. If the plaintiff wins the lawsuit, he has the right to collect any judgment the court issues with liens, levies or garnishment.

Dismissing a Debt Lawsuit

Loan contracts that violate state-law limits on interest rates can't be enforced. If a lender files suit on such a loan, the defendant can respond with a motion to dismiss, on the grounds that he signed an illegal contract. The lender would have no recourse, and no legal authority to collect. However, the burden is on the defendant to show that he signed an invalid contract, that the debt has been paid, or that he's not the proper defendant in the case.