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

Payday loans provide a way for workers to get money quickly. What might surprise many borrowers: falling behind in repaying these loans can land them in court – and even behind bars.

The problem stems from a clause in payday loan contracts, as well as oddities in the US legal system. Over 99% of in-store payday lenders have what is called a small claims “exclusion” in their contracts, which means that instead of going to arbitration for unpaid debt, they can take the case to 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 a new to study of the Consumers Federation of America (CFA).

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

“This study provides a disturbing example of a ‘pipeline from debt to prison’,” CFA chief financial officer Christopher Peterson said in a statement. “Some payday lenders use criminal justice system to collect rates three-digit interest rate of insolvent consumers. “

The typical amount of payday debt that brings a borrower to court, according to the study: $ 994. And given the exorbitant interest rates on payday loans and auto title loans, which are secured by a borrower’s vehicle, it’s no surprise borrowers are falling behind. The rates for these loans are on average almost 400%, which works out to about $ 15 for every $ 100 borrowed; some lenders load more than 1000%.

The “pipeline from debt to prison”

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

The system recalls “Dickensian” debtor prisons, the CFA said in its report.

“Advocates have described this phenomenon as a ‘pipeline from debt to prison’ which can lead to long-term psychological trauma, loss of income and other damaging 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.

Debt prisons have been abolished in the United States in the 1830s. More recently, in the twentieth century, the Supreme Court ruled in three cases, that it is unconstitutional to imprison people too poor to repay their debt. But the decisions have 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 jail someone for an unpaid debt, people who fall behind in paying off a debt find themselves under arrest or locked up due to issues such as failure to pay. go to a hearing. But making court appointments can be difficult for many low-income borrowers, who may have rigid work schedules or lack transportation.

This is what happened to Cecila Avila, a Walmart employee, according to a ProPublica Report in December. Avila, who said she couldn’t take time off work to go to court over her payday loan payments, was arrested at her store and handcuffed in front of shoppers and coworkers.

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

Order for medical expenses

In rural Kansas, some consumers also have face 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 “debtors review.” But if two hearings are missed, the judge issues an arrest warrant for contempt of court. The deposit is set at $ 500.

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