Losing Ground on Payday Loans? Perhaps Bankruptcy is the Answer

If you’ve been reading my stuff, you know I’ve said this before.  My clients are good people.  Prior to giving up and deciding to come see me, they have tried just about everything and anything to avoid bankruptcy.  Among the various desperate measures many have tried is the payday loan.  What is a payday loan?  It’s one of the worst, most despicable, predatory schemes ever devised by the greedy and clever.

How does a payday loan work?  Well, it’s aimed of course at people who are employed and who as a result have a regularly scheduled payday.  It can be done at a storefront or on a web site.  These days most of the payday loans I see have been done on line.  One starts by providing bank account information along with employment information.  This includes the amount of a  typical paycheck and when it is ordinarily received. One site I just looked at claims to be able to approve the loan within two minutes.  Typically the amount will be about $500, but sometimes it can be more.  The money will be deposited into the borrower’s checking account within a day or less.

The borrower doesn’t have to repay the loan until after his or her next paycheck is deposited into the checking account.  What can be the harm?  At about the time the pay check from the borrower’s job is deposited into his or her account, the whole loan is automatically repaid by an automatic withdrawal, with interest – lots of interest.  One site I just reviewed states that the annual interest rate will run somewhere between 261% and 1304%.  At first it doesn’t seem that bad.  For example, at an annual rate of 300% the interest on a $500 loan over two weeks is “only” about $58.

The trouble is that once a person starts doing this, it can become very addictive.  As soon as it’s been done it once, when payday comes there’s a big hole missing from the paycheck as soon as the automatic payment of the loan is made.  So what’s the obvious temptation?  Do another one, of course, to make up for the missing money.  Pretty soon it’s not hard to start taking multiple payday loans from the multiple web sites that are available for this purpose.  Then the extremely high interest, rate which didn’t look so bad at first, can really becoming quite a burden.  It can become a treadmill of dependency on these loans.  It can interfere with one’s ability to eat, pay rent or buy gasoline.  Much like the psychology involved in the slot machines at a casino, somebody has figured out just exactly what is required to keep people coming back and paying in. Usually if I see one payday loan it means my client has been at it for a long time.  It may only be one loan, one loan at a time that is.  Sometimes it’s two or three or four at a time, enough to entirely consume each paycheck.

Even after my client has hired me to do a bankruptcy, and after I have advised the client that this is the point at which they should stop paying many of their debts, there is a tendency to assume that this advice somehow does not apply to the payday loan.  It can be a surprise when I say, “it’s your account and it’s your bank and you can stop that automatic withdrawal any time you want”  I have had a few clients leave my office in a rush to try to make it to the bank in time to stop the next withdrawal.

The StarTribune recently published a feature article about payday loans and one of the big businesses in Minnesota that makes them.  According to the article the average interest rate customers in Minnesota pay for a payday loan is 277%.  Sounds like theft to me, but Minnesota is among 36 states which allow it.  If you find yourself going nowhere and losing ground on this payday loan treadmill, it’s probably time to call me for a free over the phone screening as to whether you qualify for a Chapter 7 or Chapter 13 bankruptcy.

This post is for general information purposes only, is not legal advice, and does not create an attorney-client relationship.  Nothing on this site is intended to be a substitute for retaining a competent attorney.  I am a debt relief agency.  I help people file for relief under the federal bankruptcy code.

 

My Number is on a Billboard in Blaine??!!

I just received a call from someone who says that my office phone number (952-544-6356) is on a billboard on Central Avenue in Blaine, MN near the intersection with 89th St.  Furthermore this caller indicated that it says the fee for filing bankruptcy is $860, which would be way below my usual fee even for the simplest case.

When I run a Google search for $860 bankruptcy in that neighborhood, I find references to a service which apparently is a paralegal outfit.  Their Google Plus page says they have closed or moved.  So did they put up my phone number so theirs would quit ringing or what?

If anybody else has seen this, I’d sure like confirmation that it’s actually there.  Frankly, I’m not sure what I would do about it if it was.

At the Bankruptcy Institute Today and Tomorrow

It’s that time of year again.  Every October the bankruptcy section of the Minnesota State Bar Association puts on a two day continuing legal education program for the bankruptcy attorneys of the state.  Unlike the meetings of the National Association of Consumer Bankruptcy Attorneys, to which I also belong, these sessions include lawyers for the creditors as well as lawyers for the debtors.

There were multiple classees to choose from, and nobody could attend them all without the ability to be in more than one place at the same time.  First I attended a really boring session about amendments to the bankruptcy rules of procedure.  Boring but important.  I hate it but I need to know that stuff.  There was then a sessioabout law office technology, where they had a geek who frankly I had trouble following.  I think his presentation was aimed at law offices larger than what I operate.

The big excitement for the day, however, was the session on lien stripping.  As we filed in and found a place to sit, they were playing an old hit, “The Stripper,” over the sound system.  That lightened things up a bit.  Following the disappointment with the decision in the Fisette case, to which I have devoted an earlier post, the big question is where does lien stripping go from here.  It seems that the rules committee has finished work on a new local rule of procedure which outlines a proposed procedure for doing lien stripping in the District of Minnesota.  The rule has now been presented to the judges for consideration.  As they consider the rule, I expect they will ask for comments.  The new rule seems to assume that lien stripping will be legal in Minnesota, which of course is still undecided – at least not decided permanently and for good.  In my opinion the procedure will eventually become legal and common, but right now I’m still not sure what to make of it.

The proposed lien strip rule will require a motion prior to the confirmation of the Chapter 13 plan asking the court to issue an order establising the value of the home as compared to the amounts owing on  the mortgage liens.  This motion requirement appears to be an invitation to a fight with the lender and the lenders’ lawyers.  I’m not absolutely sure, but the impression I have is that the bankers’ and lenders’ lawyers on the committee outnumber the consumer bankruptcy lawyers on the committee, so that the proposed rule is coming out leaning way in the direction of the bankers.  If this rule is approved, it appears to me that it would make the procedure more risky and more expensive than what most of us were anticipating.

After the lien strip session I attended a session on how to prepare one’s law practice for a disaster, and another sessin about reaffirmation agreements.

So that’s what I learned in school today.

"Avoid Bankruptcy" add on the radio this morning

The radio add starts out with a dramatization of a phone call where a job applicant is being asked about a bankruptcy by a prospective employer. Then the announcer cuts in and starts talking about avoiding bankruptcy by going to whoever was sponsoring the add. This angered me because I have never had a client complain to me about receiving such a call; and I hear lots of complaints about lots of things.

The bankruptcy statute has provisions prohibiting discrimination by employers because a person has filed a bankruptcy. My understanding of those provisions is that they prevent a current employer from changing employment status because of a bankruptcy filing. It is also my understanding, however, that they do not prevent a future employer from taking the filing into account. So at least in theory, a call like the one in the add is possible. I just don’t know anyone who it has ever happened to.

I do know people who have spent great amounts of cash on various debt management or debt consolidation schemes, only to ultimately wind up in my office doing a bankruptcy. When I am asked about where to go for credit or debt management counseling, I always say to avoid any outfit that you hear advertising on the radio, TV or other media. The best places to go are the nonprofit organizations such as Lutheran Social Services or Family Means. There are lots of crooked or questionable debt counseling operations. It is possible that they could do a lot of good, but great care should be taken in selecting such a service. If I were you I would avoid any service which does not have an office in Minnesota.

Just ventilating here. I think the add is way inappropriate.

So much for bankruptcy law change.

An email I received today from the National Association of Consumer Bankruptcy Lawyers (NACBA) says that Senate Bill S. 61 is stalled. It might never get to the floor for a vote. This is the bill that passed the House about a month ago, and which would have provided bankruptcy judges with authority to rewrite mortgages.

Bankruptcy judges were going to be allowed to reduce balances, lower interest rates and extend terms of mortgages. Only a very narrow group of people would have qualified for this benefit, but it still would have been – as we native Minnesotans say -a pretty big deal.

If it had passed it was my plan to attend a three day convention – basically three days of classes on bankruptcy law – which is scheduled by NACBA in Chicago for the end of May. I would have expected that there would have been plenty of classes and materials explaining the proposed changes, if they had passed. Now I think I’ll skip it for this year. I did go last year, and without those changes it would be a lot of the same material.

In a way it’s a relief. Learning a lot of new stuff would have been a bit of work. I must say, however, that I am disappointed to see all the hoopla and fanfare followed by nothing but a big thud.

Senate to Vote Next Week on New Mortgage Relief Bill

I’m sitting here looking at an email I have received from the National Association of Consumer Bankruptcy Lawyers, of which I am a member. The Association has been pushing for legislation which would allow a bankruptcy court to order modifications in mortgage loans, something which would currently be entirely off limits. The bill is S. 2636, and the section of the bill with the mortgage modification provisions is Title IV. There is fear that before the bill is passed that this section will be removed. Now would be a good time to call or write your US Senator if you would like to see them do something about the current mortgage foreclosure crisis.

You can find the text of the bill here. I’m not sure I fully understand all the language, but it looks as if it would give the bankruptcy court authority to lower interest rates and extend the term of the loan to 30 years. I just met today with a gentleman whose mortgage balloons in less than two years. At that time he may have to just walk away from the house. If the term could be extended under the terms of this bill, the effect would be to save this guy’s house. Links to both of Minnesota’s senators can be found here, including info on how to contact them.

Bankruptcy "Abuse" Wasn’t There; Today’s Falling Stock Market

I am looking this afternoon at an October 15th article in the Duluth News Tribune. A bankruptcy lawyer I know has posted it on a local bankruptcy list serve to which I subscribe. The headline, “Bankruptcy filings are on the rise” is not really news to me. But one of the sub-headings in the article really caught my eye: “ABUSE WASN’T THERE”

The article rehashes how the credit and banking industry had lobbied for passage of the 2005 new legislation on the theory that a large number of people had been “abusing” the bankruptcy system. But then it takes a closer look at the filings under the new law, especially the ratio between Chapter 7s – which is where most of the abuse was supposed to have been happening – and Chapter 13s – which are preferred by the banking industry. They note that the ratio between 7s and 13s is the same now as it was in 1999. That ratio together with quotes from a credit counselor at Lutheran Social Services seems to support the proposition that the perceived “abuse” never actually existed.

In fact, judging by the whipping that some of the banks and credit card companies seem to be taking in the stock market today, it seems clear to me that a great deal of irresponsible behavior – abuse if you want to call it that – was engaged in by the bankers and lenders themselves. At the time of this writing, the Dow is down 192 points; and it’s been dropping for several days in a row. It is my hope that our economy can absorb the shock that is being expressed in today’s market, but I’m not at all sure that we won’t wind up in a recession. If it happens, I don’t think it will be the consumers who will be to blame.

A Home Equity Line of Credit is a Mortgage

When the same thing keeps happening over and over again, I feel I should say something. Yesterday I met with a well-dressed, obviously educated and intelligent man. We talked about filing bankruptcy. He brought in and deposited on my desk a stack of documents that I usually request for such meetings. As I looked them over I said something that referred to him as having two mortgages. He seemed surprised and stated that he had only one mortgage.

At this point I had to take a breath and explain that a home equity line of credit is a mortgage, usually a second mortgage – but a mortgage. When you use a line of credit like that, it is like withdrawing money from a bank account – only it’s not money in a bank account, it’s the equity in your home. It always disturbs me to see people doing this because:

  1. Most don’t seem to realize that a home equity line of credit creates a lien on their home and therefore eats away at their home equity.
  2. Under Minnesota law the equity in our homes is one of the few things that most creditors cannot take away, except of course for a creditor holding a mortgage.
  3. Unlike a credit card debt or a medical bill, amounts owing on home equity lines must be paid, even in the event of a bankruptcy filing, unless the debtor is willing to let the home be foreclosed upon.

It seems to me that the loan officers do their best to make sure that consumers don’t understand the true nature of these credit lines. Not only don’t they explain it, but they can be downright deceptive about it. They talk as if it is free money, and encourage that kind of unhealthy thinking. Then they give the consumer an incomprehensible stack of papers that nobody understands, and say “sign here.”

I strongly suggest that if you need to go into debt for any reason, be sure you are doing it in a way that does not diminish the equity in your home. Beware of paperwork that puts a mortgage on your home in exchange for a favorable interest rate. That deal is not as good as it looks.

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