If you’re overwhelmed by debt, you may have borrowed money from a tribal lender after being turned down by traditional banks or credit unions. Many people are surprised to learn that these loans often carry extremely high interest rates, sometimes several hundred percent annually.

One of the most common questions I hear is:

“Can tribal loans be eliminated in bankruptcy?”

The answer, in most cases, is yes. Tribal lenders are not exempt from the federal Bankruptcy Code, despite language that often appears in their loan agreements.

What Is a Tribal Loan?

A tribal loan is a loan made by a lending company owned or affiliated with a federally recognized Native American tribe. Because the lending business is operated on tribal land or under tribal authority, many lenders claim they are governed primarily by tribal law rather than the laws of the state where the borrower lives.

These loans are typically:

• Small-dollar personal loans
• Installment loans
• Emergency loans
• Available to borrowers with less-than-perfect credit
• Approved quickly online

Unfortunately, they also frequently carry very high interest rates and fees.

Do State Usury Laws Apply?

Every state has laws limiting how much interest a lender may charge. These are known as usury laws.

Many tribal lenders argue that because they are tribal entities, state usury laws do not apply to them. Instead, they contend that tribal law governs the loan.

Whether a particular lender may successfully rely on tribal sovereign immunity or avoid state lending laws depends on the specific facts, the lender’s relationship with the tribe, and the applicable federal and state law. Courts have reached different conclusions in different cases.

As a result, borrowers often face interest rates that would be illegal if charged by a traditional lender operating solely under state law.

Can Tribal Lenders Avoid Bankruptcy?

For years, many tribal loan agreements included provisions stating that:

• Federal bankruptcy law did not apply.
• The borrower waived rights under federal law.
• Only tribal courts had authority over disputes.
• Federal and state courts lacked jurisdiction.

These provisions were intended to discourage borrowers from seeking relief in bankruptcy.

However, private contracts cannot override federal bankruptcy law.

The Bankruptcy Code is federal law enacted by Congress under the United States Constitution. Parties cannot simply agree that the Bankruptcy Code will not apply.

The Courts Rejected These Attempts

One of the leading decisions is:

Hayes v. Delbert Services Corp., 811 F.3d 666 (4th Cir. 2016).

In Hayes, the court considered loan agreements that attempted to disclaim the application of federal and state law and instead required disputes to be governed exclusively by tribal law.

The Fourth Circuit concluded that these provisions were unenforceable because they amounted to an attempt to avoid the application of federal law altogether. The court stated that an arbitration agreement cannot be used as a vehicle to prospectively waive federal statutory rights.

Likewise, the United States Supreme Court has long held that contractual provisions requiring parties to waive federal statutory protections before a dispute arises are generally unenforceable.

In Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985), the Court explained that parties may not use contractual provisions to prospectively waive rights granted by federal statutes.

Are Tribal Loans Dischargeable in Bankruptcy?

Generally, yes.

A tribal loan is typically an unsecured personal loan, just like:

• Credit cards
• Signature loans
• Payday loans
• Online installment loans

Unless the creditor proves that one of the specific exceptions contained in 11 U.S.C. § 523 applies (such as fraud), tribal loans are generally discharged in a Chapter 7 bankruptcy and treated like other unsecured claims in a Chapter 13 bankruptcy.

Simply being a tribal lender does not create a special exception to discharge.

What Happens After You File Bankruptcy?

Once your bankruptcy case is filed, the automatic stay immediately goes into effect.

The automatic stay generally prohibits creditors—including tribal lenders—from:

• Calling you to collect.
• Sending collection letters.
• Filing or continuing lawsuits.
• Garnishing wages.
• Attempting to collect discharged debts outside the bankruptcy process.

Like other creditors, tribal lenders must respect the protections provided by the Bankruptcy Code.

The Bottom Line

Tribal loans often come with extremely high interest rates and complicated legal language designed to make borrowers believe they have few rights.

Fortunately, federal bankruptcy law cannot be waived by private contract. While disputes over tribal sovereignty may affect certain lending issues, they do not place tribal lenders outside the reach of the Bankruptcy Code.

In most bankruptcy cases, tribal loans are treated like other unsecured debts and are dischargeable unless the lender proves a specific statutory exception.

If tribal loan debt has become overwhelming, bankruptcy may provide the fresh start that Congress intended.

Have questions about tribal loans or bankruptcy? An experienced consumer bankruptcy attorney can review your specific loans, explain your rights, and determine whether Chapter 7 or Chapter 13 is the best solution for your financial situation.