Can Filing Bankruptcy Stop Bank Account Garnishment

Do payday lenders offer a way out or just enough rope to. Hang yourself?

Sixty-four-year-old Patricia Bailey is a self-described

, but
not of drugs or alcohol; she’s

1. Physiologically or psychologically dependent on a habit-forming substance.

2. Compulsively or habitually involved in a practice or behavior, such as gambling.
 to payday loans–easy money
for a woman who has
Often. Often used in combination:

[Middle English, from Old English; see upo in Indo-European roots.
 times been desperate to make ends meet. Despite
being hounded by collection agencies and creditors for 10 years,
enduring wage garnishments, losing her home and filing for bankruptcy,
Bailey says she still feels the urge to take out another
payday loan


“I do still think about them when I am on a temp assignment. I
have no meds for my diabetes right now and my car needs a new

 n (Aut) →

 steer n (Aut) →

” she explains, “but I am clean at this point in my

Recognizing her dependence on payday loans, Bailey is today an
advocate for greater regulation of the industry, especially

. She has testified
1. Three times.

2. In a threefold quantity or degree.

3. Archaic Extremely; greatly.
 before state legislators and wants to
help prevent others from being swept into the “cycle of debt”
she has experienced.

Of course not everyone is a critic of the payday lending industry.
You might call Rachel Lopez the industry’s poster woman. As a
19-year-old college student, she needed some quick cash to pay for her
books and school supplies. She knew her single mom couldn’t afford
to help, so, despite the fact that she had a credit card and says she
could have used it to pay for her books, she opted instead to take out a
payday loan from CheckCity.

That was nine and a half years ago. Today, Lopez is manager of
CheckCity’s Orem store. After engaging in several payday loans
through the company, Lopez says she wanted to work there. She’s
been a store manager for six years now and says she loves helping
customers who visit the store for their short-term credit needs.

“The loans helped me out and I know we help people. We really
do,” she says.

Market Forces

While some 14 other states have banned payday lenders (also called
“short-term lenders” or “deposit lenders”), the
industry has found fertile soil in Utah with more than 500 payday
lenders. The payday loan industry estimates there were more than one
million cash advance transactions in Utah in 2010, but the actual number
may be significantly higher. For example, a 2006 study by the Center for
Responsible Lending estimated that Utah’s payday lenders had loan
volume of nearly 453 million in 2005–with $69 million in costs to Utah

One primary reason payday lenders are sprouting all over the

 (star cluster): see Praesepe.


heraldic and verbal symbol. [Western Folklore: Jobes, 193]

See : Industriousness
 State is the friendly regulatory environment and, most
assuredly, the lack of a
 see interest.


In law, the crime of charging an unlawfully high rate of interest. In Old English law, the taking of any compensation whatsoever was termed usury.
 cap. Interest rates that range from 390
to 1,000 percent have brought condemnation from Utah consumer advocate

“In the depression, the mafia’s interest rate was 250
percent,” says Linda Hilton, director of the Coalition of Religious
Communities, a group that works on economic social justice. “One
effort tried to cap the state’s states usury rate at 500 percent,
but no one [in the legislature] would touch it. We have tried several
times to cap it over the last 12 years.”

Hilton not only criticizes the
 adj. referring to the interest on a debt which exceeds the maximum interest rate allowed by law. (See: usury)
 interest rates, but also
complains that borrowers should not be allowed to take out multiple
loans on one paycheck. Further, she asserts that the payday loan
industry targets low-income people, students and minorities, and says
payday lenders deliberately locate their stores in low-income areas, or
where students and minorities live. Bailey believes payday lenders
target the elderly as well.

Jerry Jaramillo, supervisor of savings and loans and trusts for the
Utah Department of Financial Institutions, says the state has been
regulating payday lenders since 1999, but “the legislature’s
position is that it is up to the individual to decide if that loan, at
that interest rate, is in the best judgment of the borrower.” He
adds that usury rates in Utah are market driven and based upon
“whatever people are willing to pay.”

Ordinary People

Utah’s payday lenders describe their customers as ordinary
people with middle incomes, usually earning $25,000-$50,000 per year.
Wendy Gibson, another CheckCity store manager, says her borrowers are
working class people, under the age of 45, with families.
“Thirty-two percent are homeowners; 54 percent have major credit
cards; 100 percent have steady incomes; 100 percent have checking
accounts; more than 90 percent have high school diplomas or better, and
over 50 percent have attended some college or have a degree.”

But that’s not how Hilton and others describe payday loan
customers. Hilton says they are generally “desperate people in
desperate times that will take desperate measures if they are available.
It’s not stupid people being stupid. It’s desperate people
trying to survive,” she says.

Bailey is a prime example of the desperate measures Hilton
describes. At one point Bailey had seven payday loans tied to one
paystub. “Was I desperate?” she asks. “Absolutely! In
fact for the second time in my life, I felt ending my life would be far
better than what I was living.”

Paula Carr, Ogden City Justice Court administrator, says payday
loan customers are “endemic of the demographic–any time you have a
military base or colleges, you have a lot of payday loans. In Ogden we
have a lot more people that are living at or below the poverty line than
other cities.” Consequently, Carr says her justice court has a high
percentage of payday lenders filing small claims cases. “I would
imagine the other justice courts are similar,” she adds.

Earlier this year, the Coalition of Religious Communities produced
a report showing that in Utah County, 62.5 percent of the small claims
cases seen were brought to court by payday lenders. But Gibson argues
that the actual number of small claims filings is small compared to all
of the payday loan transactions that do not end up in court.

“Small claims court is a last resor [for any lender]. At
CheckCity, we try every means possible to work with the borrower before
we go that route,” she says. Further, she asserts that payday
lenders don’t want to lend to borrowers that can’t repay.

Perhaps that is true for CheckCity but not for the industry as a
whole. Bailey’s experience seems to prove otherwise.

Bailey filed for bankruptcy in 2004. Her $41,000 of debt included
seven payday loans. In 2005, with limited income, she turned around and
borrowed another $3,271 via 16 payday loans from nine different lenders.
“As an alcoholic or a drug addict does not know where the money
will come from for their next fix, an addict of payday borrowing wonders
where the next lender is that you can borrow from in orderto pay the
other [lender] you used that money to pay yet another [lender],”
says Bailey.

Cycle of Debt

Critics of the payday industry say that most payday customers–like
Bailey–are repeat or “trapped” borrowers locked into
revolving high-priced, short-term credit rather than more reasonably
priced long-term credit. Preston Cochrane, president and

 of the AAA
Fair Credit Foundation, a nonprofit
credit counseling

 agency, says
nearly a third of the people his agency assists are tied up in payday
loans. “And if they have a payday loan, they typically have three
or four loans, not just one.”


Moreover, Cochrane says in his experience, the payday lending
business model is set up to encourage borrowers to return “again
and again to renew the loan. Once someone gets into the cycle, it’s
hard to get them out.”

Some states
subscribe to

 a database that tracks payday loan
activity to prevent borrowers from taking out multiple payday loans
within a certain time period. Frank Pignanelli, a lawyer and lobbyist
for the Utah
Consumer Lending

 Association, says that would be
prohibitively expensive.

Gibson adds that at CheckCity, she can see how many lenders a
borrower has visited in a certain time period and other factors that
identify a borrower’s stability and ability to repay a loan. She
claims that many payday lenders use a third-party reporting agency to
monitor customer borrowing habits in order to weed out those with a
troubled borrowing history.

Short-term credit is often the last, best option for CheckCity
clients, whose only alternative would be to bounce a check. “[Our
customers] are very thankful that we are able to save them money by
offering an effective, cheaper option to their short-term credit needs

in lieu of

 bouncing checks,” says Gibson.

“There is a reason this industry is well-liked and used:
It’s cheaper and more convenient than the alternatives [fees and
penalties],” says Pignanelli. “You can’t even get a $300
loan for a week from a bank or credit union.”

But that short-term loan could prove expensive in the long run. A
study from the Center for Responsible Lending found that the typical
payday borrower pays back $793 for a $325 loan. And
according to

1. As stated or indicated by; on the authority of:

2. In keeping with:

 research from the FDIC’s Center for Financial Research,
high-frequency borrowers account for a disproportionate share of a
payday lender’s loans and profits.

Unreasonable Rates?

While other states have put caps on the usury rates (according to
Jaramillo, the cap is 36 percent in
New York
 Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of
), Gibson says it would be
impossible for a payday lender to operate in Utah with a cap of 36
percent because the business model is built around processing microloans
for short periods of time, usually a week to two weeks. Such a low
interest rate would not generate enough revenue to cover overhead
expenses, wages, benefits to employees or income taxes, she says.

“The cost to issue a loan is well above the fee we would make
if the

 was set at 36 percent. In fact, at that rate we would only
collect 69 cents for a $100 loan for a week, which wouldn’t even
pay the employee to process the loan, let alone cover rent or other
overhead expenses,” she explains.

“The smaller the dollar amount and the shorter the loan
period, the higher the APR has to be in order to break even. The APR
that we need to charge to make a profit and cover expenses at my company
is 417 percent, which translates into a relatively small fee. If a
customer borrows $100 for four days, the fee is only $4.57.”

Further, Gibson says her industry encourages the responsible and
informed use of its financial products. “Legislation has been
passed to help reduce the cycle of debt that borrowers can get into. One
Utah law requires short-term lenders to stop charging interest on a loan
after 10 weeks, effectively enforcing a 10-week interest cap,” she

Another Utah law requires payday lenders to offer interest-free
extended payment plans. “These are two effective ways to help
ensure borrowers can repay their short-term loans, avoid collections and
reduce the need to take out multiple loans.”

Gibson also points out that of the one million-plus cash advance
transactions in Utah in 2010, the industry received less than 10
complaints. However, those complaints were made to the Utah Department
of Financial Institutions. In truth, more complaints were filed to the
Utah Better Business Bureau (

A medium grade assigned to a debt obligation by a rating agency to indicate an adequate ability to pay interest and repay principal. However, adverse developments are more likely to impair this ability than would be the case for bonds rated A and above.

Jane Driggs, president of the BBB in Salt Lake City, says in 2010
her office received 256 complaints against Utah-based payday lenders–a
52 percent increase over the previous year. Nationally, the BBB received
1,143 complaints against payday lenders. If you do the math, nearly one
out of four complaints was against a Utah payday lender. Nonetheless,
compared to the million-plus loans generated by Utah payday lenders in
2010, the number of complaints is fairly negligible.

Despite the criticism from consumer advocates, Gibson says the
payday lending industry thrives because it provides a valuable service.
“It is very rewarding work, especially with the positive feedback
we receive from our customers,” she says. “All types of
unexpected events can come up and, unfortunately, many people do not
have a backup plan.”

On the other hand, Cochrane believes many payday loan customers
“are addicted to spending and don’t have the money.”
Thus, they get over-extended and caught in a debt trap from which they
cannot get out.




By Gaylen Webb | Illustrated by David Habben