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Payday loans and bankruptcy: The dangers of predatory lending

Much ado has been made about the relationship between payday lending and bankruptcy among residents of Washington, D.C., and other jurisdictions. Payday lenders find themselves vilified for contributing to Chapter 7 bankruptcy proceedings among a variety of populations. This may be for good reason; many states have actually banned high-interest payday loans that put residents at risk of financial ruin. If we take away payday loans, will personal bankruptcy rates drop? Further, will citizens end up looting or turning to crime because they can't access easy cash? Experts say that eliminating payday loans is unlikely to have the negative consequences that have been publicly decried by industry leaders, and that consumer protection should be prioritized.

A total of 13 states currently prohibit the sale of these short-term, high-interest financial products. Payday loans are generally designed to help borrowers meet their obligations through the next paycheck; however, they tend to trap borrowers in horrible cycles of debt and repeat borrowing. Laws in many states cap borrowing percentages at or below 36 percent, which is still a significant chunk of change. Borrowers who are stuck in such debt traps may not realize that they have options, up to and including personal bankruptcy to resolve their financial challenges.

Further research shows that about 80 percent of payday loans are given to borrowers who are already stuck in a destructive debt cycle. These borrowers are likely to remain stuck in a debt trap for at least 11 months, according to some studies. Despite this, industry professionals still contend that borrowers are generally pleased with their lending experience; one company claims that 98 percent are satisfied with the process.

Regardless of industry claims, statistics point to the fact that personal bankruptcy problems may be directly associated with bankruptcy. In fact, the chance of filing for Chapter 13 bankruptcy doubles after a client takes on the first payday loan. Legislators and banking institutions should take additional steps to protect borrowers from such high-stakes predatory lending practices.

Source: Consumerist, "Believe It Or Not, Outlawing Payday Loans Will Not Lead To Looting & Pillaging" Ashlee Kieler, Apr. 06, 2014

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