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Payday Lending and Bankruptcy

Many of our personal bankruptcy clients have payday loans.  These are loans from companies who specialize in “short-term” loans to “get you to the next payday.”   We have always wondered about these loans, as folks who need such short-term loans are often borrowing from Peter to pay Paul…and then doing it again the next week.

A study undertaken by the federal Consumer Financial Protection Bureau (CFPB) has confirmed our worst thoughts:  only 15% of short-term borrowers could repay the debts within a pay period or two.  The average loan is $350.  But 80% had to renew their loans; 20% renewed their loans seven times!  Further, 20% defaulted on the loans.  The problems, or course, multiply and 60% of the borrowers wound up with more debt in fees than principal!

Paige Martha Skiba, a law professor at Vanderbilt University has determined that first time payday loan applicants are more likely to file for bankruptcy because they tend to “tip the balance” for an already financially stressed family.   President Obama, citing the findings in the federal study, implied as much in his speech in Alabama last week about payday loans:  interest rates on payday loans are up to as much as 456% in Alabama.

The CFPB Proposal

CFPB, the brainchild of Massachusetts Senator Elizabeth Warren, was established by Congress to protect consumers in financial matters.  A new agency, it has a short but distinguished history of working to level the playing field for consumers in financial matters.

The CFPB study looked at loans from 12 million payday loans.  After determining that the payday loan industry was misleading the regulators, and, more importantly, the consumers, the agency presented two proposals.  First, there could be a true determination as to the borrower’s ability to pay, based on an actual financial analysis.  While lenders say this is not too onerous, we are not sure how the final rules will be written.  A second and weaker proposal was for loans under $500 there must be an affordable repayment schedule, with limited repeat payday loans.

The Payday Loan Industry

According to reports, the $46 billion industry has mushroomed from a mom and pop type of loan business to an overarching business that will give short term loans, take cars as collateral, and, if not paid back, wreck your credit and charge interest rates so high that, absent a change in circumstances, many folks just can’t pay back.

The Southern Poverty Law Center has called for payday lending reform because of the “continuous cycle that [consumer victims] get trapped in.”

Payday Loans Are Dischargeable In Massachusetts Bankruptcy

The bad news is that too many folks are taking out payday loans that saddle them with debt that is the last straw.  The good news is that filing for bankruptcy protection gives you a fresh start:  payday loans are almost always dischargeable in bankruptcy.

For a free bankruptcy consultation, call Attorney Neil Burns.  He has helped clients in Massachusetts file for bankruptcy for 29 years.  With offices just blocks from the Boston Bankruptcy Court, and a free initial consultation, calling Attorney Burns to try to see if you can discharge your payday loans and credit card debt just makes sense.

Call 617-227-7423 for a free consultation today.

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