On January 30, 2013 Shan Li of the L.A. Times reported:
Nearly 44% of American households are one emergency away from financial ruin. That means they don’t have enough savings to cover basic living expenses for three months if something unforeseen happens such as losing a job or falling sick, according to a recent study by the Corporation for Enterprise Development. Almost a third of Americans have no savings account at all. . . . Many people living precariously have jobs. About 75% are working full time, and more than 15% are earning middle-class incomes of more than $55,000 a year, according to the report. But despite steady jobs, many of those surveyed are surviving paycheck to paycheck, trying to cope with the recession’s aftermath; one emergency could tip them over “the edge of financial disaster.” Possible reasons for their lack of savings? Experts say many factors could be at play, including stagnating wages, rising prices and high credit card debt.
It’s worth noting that a fairly large number of employed people are underemployed, which gives a partial explanation for the precarious position of many people.
How do folks deal with an income shortfall? Some tap into their credit cards, and increase their debts. Then they use other credit cards to pay the new credit card debt, and eventually things spiral out of control.
However, a growing number of people are turning to loan sharks for extra cash. The breathtakingly high interest rates on Payday loans, Cashcall loans, and loans from Don Corleone guarantee a bleak financial future. In the April 24, 2013 Los Angeles Times, Alejandro Lazo reported:
Payday loans often trap consumers in a cycle of debt, a new report by the federal government finds. The Consumer Financial Protection Bureau found that the average consumer took out 11 loans during a 12-month period, paying a total of $574 in fees — not including loan principal. A quarter of borrowers paid $781 or more in fees.
Interest rates on these loan shark loans can reach 500% per annum! I am not exaggerating. I have had clients show me their loan shark loan documents, and the required Truth-In-Lending disclosure had rates north of 495%.
You might wonder if these rates are even legal. Indeed they are, due to the Supreme Court’s holding in Marquette Nat’l Bank v. First of Omaha Serv. Corp., 439 U.S. at 299 (1978). I recently wrote about the relevant history leading to that decision, and its aftermath, so I won’t repeat it here. It you’re interested, take a look at that post.
What I will say is that things have gotten sufficiently dire that a bill has been proposed that would put limitations on these loans. I again quote Alejandro Lazo, this time from the April 17, 2013 Los Angeles Times:
A bill before the California Legislature would restrict the number of payday loans to any one borrower — an attempt to break the “debt cycle” that ensnares some of the state’s poorest residents. Senate Bill 515 would bar the high-cost, short-term lenders from making more than six loans a year to any borrower. The bill, set to go before the Senate Banking and Financial Services Committee on Wednesday, also extends the minimum term of a payday loan to 30 days from 15. “We need to recognize that these low-income families are desperate to get by, and they are particularly vulnerable to this type of debt trap,” said state Sen. Hannah-Beth Jackson (D-Santa Barbara), who wrote the legislation.
Unfortunately, that bill died. On April 18, 2013 Jon Healey reported in the Los Angeles Times:
A bill to limit payday lending that The Times’ editorial board championed Monday died in a state Senate committee Wednesday, after several lawmakers said they feared the bill would cut off hard-pressed consumers from a ready source of cash.
That was good news to those who feared that some borrowers might escape the loan shark plantation. After all, loan sharks have to make a living. And what a living the make. A couple of years ago I had a client who worked for one of those loan shark outfits. He told me that the owner had achieved his dream of having a different car for each day of the month. And these weren’t economy cars either. They were all considerably more expensive than any car I have ever owned.
One way to deal with loan shark oppression is provided in article I, section 8 of the U.S. Constitution, and that is bankruptcy. It will clean the slate and give you a fresh financial start.
If you’ve fallen prey to Cashcall, Payday, Don Corleone, or any of the many other loan shark outfits who roam the earth seeking whom they may devour, consider getting rid of that ball-and-chain by filing for bankruptcy protection. But don’t go it alone. Use the services of a highly skilled, Board certified bankruptcy law specialist attorney.