Payday loans are almost certain to send people into New York bankruptcy, and Manhattan’s district attorney’s office has taken notice, according to an article in The New York Times’ Dealbook section. State prosecutors allege they’ve tracked down the ringleader of a payday lending scheme that trapped New Yorkers in an unending cycle of debt. Apparently, the operators were very shrewd, concealing themselves in corporate shell entities to evade regulators for years. Their goal was unusual: offer payday loans to resident states that ban them, such as New York, which caps annual interest rates on all loans at 25 percent. To do this the lenders incorporated in the West Indies and Nevada, which leniently regulate payday loans. They were ultimately discovered to be residing in Tennessee.
To give you an idea of how destructive payday loans are, the Consumer Financial Protection Bureau (CFPB) published a white paper on payday loans in April 2013. It sampled debtors at legitimate institutions that issued payday loans over the course of a year, covering 15 million loans made in 33 states. It found that the median borrower took out $250 per month with a fee of about $15 for every $100 lent. For a bi-weekly loan, the median interest rate was 4.6 percent, which comes to … 322 percent per year.
You can see why people who take out payday loans end up drowning in debt. The interest rates are so high that they have almost no choice but to go back and borrow more. It’s unsurprising that payday loans are frequently compared to drug addictions.
The CFPB determined that the median annual income for each borrower (not household) was only $22,476. Three quarters of payday borrowers made less than $33,900 per year. With high debts and low income, it’s unsurprising that 48 percent of borrowers took out ten payday loans per year. Only 13 percent took out only one or two loans. The CFPB concluded that two-thirds of the debtors were returning to payday lenders within 14 days because they needed to rollover the balance on their loans.
Dealbook reports that New Yorkers paid the indicted members of the payday lending scheme $50 million in 2012. Internal documents show that they considered New York to be the third most lucrative state despite legal safeguards against usury.
The Dealbook article can be found here, and the CFPB report is here (pdf).
The lesson should be clear, if you took on a payday loan and you’re losing control, what the lender is doing probably isn’t legal in New York. You may need to discuss your debt options with an experienced New York bankruptcy lawyer, though.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy law changes Bruce Weiner for a free initial consultation.
