Q: I've heard horrible things about payday loans. A friend of mine could not make the interest payment one week. The payday lender immediately started calling my friend demanding repayment. My friend was not able to make payment arrangments so the calls kept coming. The payday lender then started calling my friend's employer and co-workers telling them that my friend was having financial problems and had to pay the debt or else. I was shocked to hear about this. Are payday loans really as bad as they seem? Why?
A. Absolutely yes. Drive through any commercial area in Las Vegas, and it won’t take long to notice a pattern. Quite predictably, every Las Vegas strip mall has a nail salon, insurance office, smoke shop, and payday loan company.
If you ask yourself why payday loan companies are everywhere in the Las Vegas Valley, the reason is as simple as asking why casinos in Las Vegas are grandiose and luxurious. The answer has everything to do with money, that is … Other People’s Money. The reality is that gamblers don’t always win and borrowers cannot always afford to repay payday loans in full on the next payday.
For those of you new to this industry, cash advance and payday loan companies including Ace Cash Express, Allied Cash Advance, Budget Loans, Cash Box, Cash 1, Check ‘N Go, Check City, Dollar Loan Centers, FastBucks, Koster Finance, The Money Man, Moneytree, Rapid Cash, and Speedy Cash pollute the Las Vegas community. Similar companies such as A1A Fast Cash, CashCall, CashNetUSA, Easy-Lender-Online.com, Loan Now, Payday-Loan-Supercenter, Payday-Loan-Yes, PayDayOne, PayDayMax, QuickCash, and Wilmington Cash Mart lurk on the internet.
Demand for Payday Loans
Undoubtedly, payday loans are convenient especially when an emergency arises. The payday loan then may seem like a blessing that could not come at a better time. Payday loans may seem attractive if you are faced with repairing a vehicle you need for work, feeding and clothing your children, buying prescriptions or paying for a medical procedure, or simply paying rent. People also resort to payday loans to cover household expenses when work hours dwindle.
The cycle of payday loans is extremely difficult to break however. The most common borrowers live paycheck to paycheck and cannot afford to save toward a “rainy day” fund, let alone repay a short-term loan in full within a week or two. These short-term loans are inherently predatory, and lenders bank on the fact that borrowers who need the loan won’t be able to repay the loan in full for a very long time. The sad irony is that borrowers who can actually afford to repay payday loans on the next payday are the same people who do not need or use them.
Basics of Payday Loans
The true cost (finance charges) of a cash advance/payday loan is extraordinary. Interest rates vary depending on the payday loan company. Interest rates typically range from 99.0% to 500.0%. Dollar Loan Centers recently ran a series of television advertisements in the Las Vegas area boasting of a low interest rate guarantee. Dollar Loan Centers website, www.dontbebroke.com. states “Dollar Loan Center offers among the lowest rates in the industry. Our short term loans are guaranteed to beat the rate of any payday loan company in the local area…. We guarantee to beat their rate or your loan is interest free!”
A low interest rate, which may be low compared to the industry standard, could be 99.0% or more. A loan for $1,000.00 at 99.0% will double in just over one year. If the loan is repaid in full at the next payday, the finance charge will seem insignificant. However, pay the interest only to reactivate the loan, and the interest charge will steadily add up. Worse, though, miss the deadline, and additional fees will apply. Late charges are regularly assessed by short-term lenders and can cost a borrower an additional $5.00 per day. Most borrowers cannot afford to repay the loan in full at the deadline and are forced to pay the interest week after week to reactivate the loan.
Amounts loaned also vary by lender. Some companies will extend short-term loans for several hundred dollars while others will lend thousands of dollars. The larger the loan the more difficult it will be for the average borrower to repay the loan in full quickly. Consequently, the longer it takes to repay the loan, the greater the probability that the borrower will repay twice, thrice, or quadruple the original payday loan in the end.
Lenders may or may not require collateral. Lenders may only accept certain types of collateral pursuant to Nevada law ( See Nevada Revised Statutes §604A.435 ). Many lenders will require a post-dated check from the borrower. The lender will attempt to cash the check if the borrower fails to repay the loan or to reactivate the loan by paying the interest charges by the repayment deadline. Since most borrowers cannot repay this short-term loan as required, what results is a hellish cycle. Returning every payday (or every week) to pay just the interest, borrowers are kept on a very short leash. The weekly trek to the payday loan store becomes a constant reminder of the borrower’s financial predicament. It is a nightmare that never seems to end.
Accounts in Default and Collection Activity
The finance costs alone can be overwhelming. Collection efforts can be downright dreadful even though state and federal law prohibits certain collection activity. The federal Fair Debt Collection Practices Act (FDCPA) found within 15 U.S.C. §1692 only pertains to collection agencies and attorneys, not the original creditor. In general, the FDCPA permits collection activity only during certain hours and prohibits “abusive or deceptive” practices.
The State of Nevada requires payday lenders to collect in a “professional, fair and lawful manner” ( See N.R.S. §604A415 ). Nevada law, specifically N.R.S. 604A.440, also prohibits payday lenders, known as licensees, from using the criminal process of the State to collect a debt. (According to N.R.S. §604A.075, a licensee includes, “any person who has been issued one or more licenses to operate a check-cashing service, deferred deposit loan service, high-interest loan service or title loan service pursuant to the provisions of this chapter.” N.R.S. §604A.440 states, “A licensee shall not: (1) Use or threaten to use the criminal process in this State or any other state, or any civil process not available to creditors generally, to collect on a loan made to a customer.”)
Payday lenders are perhaps the most aggressive of all creditors. When a borrower defaults, payday lenders will contact the borrower immediately. Frequent follow-up calls ensue. It is not uncommon for employees of lenders to contact a defaulting borrower in person at the borrower’s residence. If these collection efforts are unsuccessful, many lenders’ employees will contact the borrower’s friends, family members, co-workers, and employers about the debt owed. This sort of collection can be very effective as the defaulting borrower is often intimidated or embarrassed into repaying the debt.
Most loan contracts also give the lender permission to collect the full loan balance by presenting the borrower’s post-dated check to the bank. Presentment of the borrower’s check to the bank may deplete the borrower’s available funds for regular expenses or, worse, overdraw the account. As a last resort, payday loan companies will sue borrowers in state court to obtain a judgment. With a judgment, the lender can collect non-exempt assets such as bank accounts, 25% of wages, etc ( See non-exhaustive list of Nevada exemptions outlined in N.R.S. §21.090 ).
Some overly aggressive collectors have been known to threaten the arrest or imprisonment of a defaulting borrower. Keep in mind that debtors’ prisons were eliminated in the United States by the mid 1800s. Such representations are also unlawful and may be used against a lender to offset or reduce the debt owed.
The Clark County District Attorney’s role is to pursue criminal matters through prosecution in Clark County, Nevada. The Clark County District Attorney according to Policy will not collect or criminally pursue defaulting payday loan borrowers based on post-dated checks returned for insufficient funds. The D.A. also will not prosecute other bad checks under certain circumstances. Since the Clark County District Attorney will not prosecute post-dated checks, it is unlawful for a payday lender to threaten to have a defaulting borrower arrested in an effort to collect on the loan.
Many payday loan borrowers resort to filing for bankruptcy to break the loan cycle. A
bankruptcy filing has two effects. First, it provides immediate relief from most creditors including payday loan companies. Second, bankruptcy eliminates most unsecured debt including payday loans.
11 U.S.C. §362, also known as the Automatic Stay provision of the United States Bankruptcy Code, goes into effect upon the filing of a bankruptcy case. The Automatic Stay requires all collection activity including collection calls, collection demands and letters, lawsuits, garnishments, etc. to cease. The purpose of the Bankruptcy Code is to ensure the orderly administration of the debtor’s (borrower’s) assets and liabilities. If creditors were allowed to continue collection while the debtor’s liabilities were handled by the court, some creditors could receive an unfair advantage and a greater portion of the debtor’s assets, which would defeat the purpose of the Bankruptcy Code. Lenders who continue collection activities violate the automatic stay provision and can be sanctioned.
Borrowers should be mindful of several factors pertaining to payday loans in the context of a bankruptcy filing.
1.) Many payday loan companies will require borrowers to provide a post-dated check at the time when credit is extended. This check is retained by the lender until the loan is repaid in full. If the borrower defaults, the lender will present the check to the borrower’s bank. Despite the Automatic Stay, a payday lender may cash the borrower’s check after the bankruptcy is filed. The automatic stay provision contains several exceptions. One exception of particular importance is 11 U.S.C. §362(b)(11). This exception allows creditors to present a negotiable instrument (check) to a bank after a bankruptcy filing without violating the automatic stay. Courts also recognize this limited exception and do not interpret such actions by a creditor (lender) as a violation of the stay. (See In re Hines. 198 B.R. 769 (9th Cir. BAP. 1996); Morgan Guar. Trust Co. of N.Y. v. American Sav. & Loan Ass'n. 804 F.2d 1487, 1492 (9th Cir. 1986), cert. denied, 482 U.S. 929, 107 S.Ct. 3214, 96 L.Ed.2d 701 (1987); and In re Roete. 936 F.2d 963 (7th Cir.1991). Even though, it is possible to recover sums taken under 11 U.S.C. §549 resulting from post-petition transfers, a sounder (and pro-active approach) is to close the bank account prior to presentment of the borrower’s check.
2.) To prevent any outstanding checks issued to payday lenders from being cashed after the bankruptcy is filed, the debtor should close the bank account upon which the outstanding check is drawn. Another option is to issue a stop payment on each post-dated check issued to a payday lender. It is important to verify with each bank that the stop payment request will be honored both for a physical presentment and/or for ACH or electronic transfers. The reason for this extra precaution is that some ACH transactions are not stopped by a stop payment request as a result of federal law known as Check 21.
Failure to take appropriate action could result in the payday loan lender cashing the outstanding check(s) and reducing the funds available to pay household expenses or overdrawing the account.
3.) A Word of Caution: Cash advances or payday loans incurred within 70 days prior to filing for bankruptcy and totaling $925.00 or more are presumed to be fraudulent. Debt presumed to be fraudulent is considered non-dischargeable. Payday lenders, however, must file an adversary proceeding in order for the court to determine the debt to be non-dischargeable.
A presumption is similar to an assumption. The court essentially assumes the debt was incurred fraudulently until the debtor shows otherwise. The presumption means that the burden falls on the debtor to convince the court that the debtor did not intend to defraud the lender. Just as intent to defraud is hard for a creditor (lender) to establish, it is equally difficult for a debtor to show that he/she intended to repay the debt.
Payday loans are short-term loans and must be used responsibly. The benefits are few while the costs are many and may be overwhelming. Avoiding payday loans or advances is the soundest financial decision. Before relying on cash advance or payday loans, calculate the true cost of the loan and realize these loans are not a solution, but a quick fix. With hope, familiarity with the consequences of and difficulty of repayment will also sufficiently deter those thinking about undertaking this predatory debt.
Q: I took out a payday loan over six months ago and have paid interest charges every since. I have paid interest charges totaling more than the original loan but the loan balance never decreases. I cannot afford to pay back the entire loan or pay down the balance because my interest charges are so much. How can I get out of this horrible cycle?
A: Bankruptcy may be your only option. Bankruptcy eliminates most unsecured debt including payday loans and cash advance loans. A bankruptcy filing also provides immediate relief from the lender's collection efforts in most circumstances.
There may be a complication to the bankruptcy filing, not to the discharge of the debt itself, if a payday loan borrower has issued a check to the payday lender.
Once the bankruptcy case is filed, the Automatic Stay provision prohibits the payday lender from most collection activity including collection calls and the initiation or continuation of a lawsuit. However, there is one major exception pursuant to 11 U.S.C. §362(b)(11). Payday lenders who have a negotiable instrument (check) from a defaulting borrower may present the check to the bank without violating the automatic stay. In other words, the bankruptcy filing will not stop the withdrawal of funds from the debtor's bank account if made by check after the bankruptcy case is opened.
By cashing the provided check, a lender may overdraw the debtor's bank account or take funds that the debtor otherwise needed for household expenses such as rent. The best way to prevent the unexpected withdrawal of bank funds or the overdrawal of the debtor's bank account is to close the account upon which the post-dated check was drawn.
It is also highly recommended that debtors open a new bank account prior to the bankruptcy filing if a new bank account is desired. Most banks use a system called Telecheck Systems or similar company to verify the financial responsibility and creditworthiness of customers. Telecheck Systems will receive notification of a bankruptcy filing, which may affect a new customer's creditworthiness. Consequently, banks may deny the applicant who has recently filed for bankruptcy. However, by setting up the desired bank account prior to filing for bankruptcy, banks and Telecheck Systems are unlikely to have any grounds to deny the applicant a new account.
Q: Are there any restrictions on how payday loan companies operate (such as the amount of credit that can be extended, number of loans that can be given, collection practices of the company if a customer defaults on a loan, etc.)?
A: Yes. Nevada law contains four specific provisions regarding prohibited acts. The provisions are detailed below:
- N.R.S. §604A425 : The Amount Of The Loan
- N.R.S. §604A430 : Multiple Loans To The Same Customer
Q: If I default on my payday loan, will I have to pay the contract interest rate (300% or more) forever?
No. According to Nevada law, specifically N.R.S. § 604A.48 5 , a payday loan company can only charge the contract rate of interest up to the point that you default.
After the default, the applicable interest rate is established by law as the prime rate of the largest bank in Nevada plus 10 percent. This established rate of interest can only be charged for a 90-day period after the default.
Upon expiration of this 90-day period (post-default), the payday loan company may not charge or collect any interest on that loan.
**NOTE: Specific laws govern title loans and the restrictions on interest rates for title loans. See N.R.S. § 604A.44 5; N.R.S. § 604A.45 0; and N.R.S. § 604A.455 for more information on title loan regulations.
Copyright © 2008-2015 (All Rights Reserved)
Law Office of Dawn Papaeliou, P.C.
1489 W. Warm Springs Road, Ste. 110