Payday loans: ‘Dickensian’ system sends borrowers to jail, group says

Payday loans offer workers a way to get cash fast. What might surprise many borrowers: falling behind on these loans can land them in court — and even behind bars.

The problem stems from a clause in payday loan contracts, as well as quirks in the US legal system. More than 99% of payday lenders have what’s called a small claims “exception” in their contracts, which means that instead of going to arbitration for an unpaid debt, they can carry the case in small claims court.

If the borrower does not appear in court, he can be arrested for contempt of court. And that’s exactly what’s happening, with payday lenders increasingly relying on this strategy, according to new research from the Consumer Federation of America (CFA).

In Utah, which has lender-friendly laws, about two-thirds of small claims cases were tied to payday lenders and other high-rate lenders, according to CFA analysis.

“This study provides a disturbing example of a ‘debt-to-prison pipeline,'” Christopher Peterson, director of financial services at CFA, said in a statement. “Some payday lenders are using the criminal justice system to collect triple-digit interest rates from insolvent consumers.”

According to the study, the typical amount of payday debt that brings a borrower to court is $994. And given the sky-high interest rates on payday loans and so-called auto title loans, which are secured by the borrower’s vehicle, it’s no surprise that borrowers are lagging behind. Rates on these loans average nearly 400%, which equates to about $15 for every $100 borrowed; some lenders load more than 1000%.

The “Debt-to-Prison Pipeline”

In Utah, the system appears to benefit payday lenders because the bond posted by borrowers is then turned over to finance companies, the report notes. And contrary to the small claims court’s goal of making a quick legal decision, some cases can drag on for years, the consumer advocacy group found.

The system is reminiscent of “Dickensian” debtors’ prisons, the CFA said in its report.

“Advocates have described this phenomenon as a ‘debt-to-prison pipeline’ that can lead to long-term psychological trauma, loss of income, and other adverse effects on debtors and their families,” he said. he noted.

The group also said similar practices could occur in small claims courts in other states.


Kansas county jails people over unpaid medical debts

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Debtor prisons have been abolished in the United States in the 1830s. More recently, in the 20th century, the Supreme Court ruled in three cases that it was unconstitutional to imprison people too poor to repay their debt. But the rulings left it up to local courts to determine whether a person is truly destitute or simply chooses not to make a payment.

Although it is illegal to imprison someone for an unpaid debt, people who delay paying a debt end up under arrest or locked up due to issues such as failing to show up for a court hearing. . But making court appointments can be a struggle for many low-income borrowers, who may have rigid work schedules or lack transportation.

That’s what happened to Walmart employee Cecila Avila, according to a report by ProPublica in December. Avila, who said she couldn’t take time off work to attend court over her payday loan repayments, was arrested at her store and handcuffed in front of shoppers and co-workers.

“It didn’t make sense to me,” she told ProPublica. “Why am I arrested for this? »

Order for medical expenses

In rural Kansas, some consumers have also risk jail time for medical debt, as CBS News reported earlier this month. In this situation, the court orders people with unpaid medical bills to appear in court every three months and declare that they are too poor to pay in what is called a “debtor review”. But if two hearings are missed, the judge issues an arrest warrant for contempt of court. Bail is set at $500.

The American Civil Liberties Union has also found that people can be arrested for fines, car loans and even credit card debt. The problem is compounded by the fact that, unlike criminal cases, defendants involved in civil cases over issues such as unpaid debts do not have the right to legal representation.

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