If you buy products online, no doubt you’ve seen the “buy now, pay later” (BNPL) option that many e-commerce companies make available as a payment option. You might have even taken out an Affirm loan to finance a larger purchase.
Payment options like Afterpay, Affirm, Klarna, Sezzle, and Zip have been great for retailers, but are they really a great option for you?
If you’re considering bankruptcy or you’ve recently emerged from bankruptcy, let’s discuss the potential issues of selecting BNPL at checkout.
Are BNPL Options Better Than Credit Cards?
Whichever option you choose at checkout, when you select a BNPL company you’re buying into the idea that these companies are “democratizing credit.” The traditional credit companies –like VISA, Mastercard, and AmEx – are considered to have rules in place that keep people with less than perfect credit from being able to access more (or even any) credit.
Traditional credit card companies use standardized metrics, like a FICO score to determine a person’s creditworthiness.
This means that when a person needs or wants to make a big ticket purchase and doesn’t have cash available or sufficient credit, the alternative was to throw yourself on the mercy of predatory lenders or payday loan companies.
BNPL companies entered the marketplace looking to make credit more accessible and more affordable.
These companies give consumers the option to pay for large purchases over time and with more attractive interest rates than those offered by traditional credit card companies.
To their credit, BNPL companies disclose their fees and interest rates upfront so consumers can make informed decisions about which repayment option makes the most sense given their economic circumstances.
This is a checkmark in the positive column for BNPL companies, especially in an industry where hidden fees and confusing interest rate calculations run rampant. Extending credit to borrowers with less than perfect credit allows people to make purchases they otherwise might not be able to afford while stimulating economic growth.
But are BNPL companies always benevolent to buyers?
The Downside of BNPL
While democratizing credit sounds very positive, there are some downsides to BNPL. According to Morning Consult, consumers who use BNPL services are more likely to be low income. Nearly 64% of adults who reported using a BNPL service reported an annual income of less than $50,000.
Many households that rely on BNPL were more likely to report that they are behind on financial obligations and that their finances “control them.”
In January 2022, 1 in 5 adults who had made a purchase using a BNPL loan service missed a payment on that loan.
The correlation between BNPL users and risky financial behavior is concerning some consumer advocates. Experts like Lauren Saunders from the National Consumer Law Center have testified before Congress that they find this pattern “distressing but not surprising.”
As a whole, the BNPL sector tends to attract people who don’t have access to traditional credit cards and who believe that BNPL offers them access to more affordable credit than it actually is in reality.
As the Covid 19 pandemic pushed people into their homes, BNPL experienced a sharp increase in usage and the Consumer Financial Protection Bureau is looking critically at the sector and trying to determine what, if any, regulations may need to be applied in the sector to protect vulnerable consumers.
Because BNPL companies don’t have to perform an “ability to pay” analysis like traditional credit card companies, these BNPL lenders don’t have to provide truth in lending statements to consumers.
Yet even with these BNPL products, missed payments can mean sharply increased fees and snowballing debt.
What if You’re Behind on Your BNPL Loan?
Once you’ve fallen behind on your BNPL loan payments, they start to feel a lot like traditional debts. If you attached the payment to your debit card, you might even be racking up overdraft fees or putting paying your other bills on time at risk.
It can also be easy to overspend when you select the BNPL option at checkout. Next thing you know, you’ve got several loans from different companies all coming due and demanding payment.
If you fall behind on or can’t make your BNPL payments you’ll probably experience some or all of the following – depending on which companies you have loans out with:
- The BNPL will freeze your account so you cannot make any future purchases.
- You may start accruing late fees and other penalties.
- Your loan may be turned over to a debt collection agency.
- A negative report may be made to credit agencies which will lower your credit score.
If you’re overextended with traditional and BNPL debt, you may be considering setting an appointment to speak to a qualified attorney who specializes in California bankruptcy law.
What Happens to my BNPL Loans If I Declare Bankruptcy?
Despite their growing popularity, there is still some question about how these debts will be addressed in a bankruptcy proceeding. For now, here’s what you need to know:
- No matter which BNPL company you selected when you checked out, you own the item. Even if you don’t complete the payment agreement according to the terms, it’s your property.
This means it will be listed as an asset in a bankruptcy filing.
- The outstanding balance for the remaining installments is an executory contract. It gets recorded on your bankruptcy forms, so make sure you bring the information on the company to your consultation.
Name and address are typically all the information that will be needed for the clerk of the bankruptcy court to reach out to your BNPL creditors.
State law will determine if you’re able to keep the item you purchased under the BNPL agreement. You will have the option to keep your payment agreement with the company the same or you can ask to be released from the obligation.
If the item subject to the BNPL is something you wouldn’t want to have to give up should the controlling state law require you to, one thing you can do to preserve ownership is to hold off on your bankruptcy until you’ve completed your installments on the item.
You’ll want to take a comprehensive look at all your financial obligations when making this decision. At Janus Law, we can help you weigh your options by taking an objective look at your current financial situation.
It’s important to remember that once you enter into a contractual agreement with a BNPL lender like Affirm, you don’t have a right to cancel that contract.
Is an Affirm Loan Different from Other Buy Now, Pay Later Options?
Each BNPL company has its own terms and conditions that you agreed to when you entered into your installment agreement with them. Affirm’s business model is to make small loans to consumers. This service fills a gap since small personal loans are typically not an option from traditional banks and lenders.
While Affirm doesn’t charge late fees or penalties, they do charge interest on their financing plans. And they do report to the major credit bureaus.
Because of their reporting practices, missing Affirm payments can quickly have a negative impact on your credit score. Affirm also evaluates your creditworthiness each time you apply for a loan with the company.
Debt you owe to Affirm will usually be discharged in a typical consumer bankruptcy scenario.
Following a bankruptcy discharge, Affirm could be a strategic way to reestablish your credit, although it is always advisable to live within your means while you rebuild your credit score and creditworthiness.
A Final Word on Buy Now, Pay Later Options
Buy now, pay later can feel like a good option when you don’t have sufficient cash or traditional credit. But these “attractive” options can also set you up for financial stress.
For many people, it can be far too easy to click the BNPL option at checkout. This can lead to overspending and eventually the potential for overdrafts and the associated NSF fees on your primary bank account.
If you’ve gotten in over your head on installment payments with BNPL companies, we’re here to discuss your options. We can help you make sense of your financial situation so you can make the right choice for you and your family today and in the future.
We know how challenging it can be to figure out if bankruptcy is really the right thing to do to get your financial life back on track and put you in control of your future spending habits.
That’s why when you schedule a free consultation with our bankruptcy specialists we analyze all your debts, income, assets, and cash flow to see what’s possible for you.
If bankruptcy isn’t the right choice, we’ll tell you.
And if it is the right choice, once you become a client of our boutique firm, improving your financial future is our top priority. We help you solve your current problems and then we set you up with a solid financial education so that you aren’t put back in the same situation.
We’re here to help you break the cycle of debt once and for all.
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