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Payday Loan Traps Lead to Chapter 7 Bankruptcy

August 1, 2012

Payday loans are digging Americans even deeper into debt, despite promises of easy, short-term payouts that people take on to help them stay afloat. moneyheap.jpg

In reviewing a new study from the Pew Charitable Trust, Orange County Chapter 7 Bankruptcy Attorney Vincent Howard learned that people in the U.S. typically spend about $7.5 billion on payday loans each year. Most of them end up paying at least another $500 a year in interest or sometimes in extreme cases as much as hundreds of times more than the original principle.

That in and of itself would not be great, given that these over-inflated loans are designed to make you pay dearly for the short-term cash advance. The bigger problem is the way people are using them.

The idea is that if you have an emergency, say an important prescription that you need filled or the replacement of a part on your vehicle so it will run, you can get a payday loan to cover the cost until you get your paycheck or have the money. They're typically marketed as a two-week cash advance for things you need but for which you can't immediately pay.

But instead what many people are doing is taking on these loans to pay for basics. These would be things such as utilities, groceries and the mortgage. These are things that should already be in your budget and which you should be able to cover. But the recession has created a situation where each month is a struggle to get to their jobs, keep the lights on and feed their families.

This is an awful situation to find oneself in to begin with, but it's exacerbated by the fact that payday loan companies gouge you on the interest. In fact, the average payday loan customers are indebted for about five or six months just to keep their heads above water.

The Pew Center's study indicates that nearly 70 percent of borrowers taking on a payday loan for the first time are using it for things like rent or utilities. Only 15 percent were taking out the money for emergencies.

It's not that people don't realize this is a problem, but they often feel they don't have a choice. The truth is if you are seeking these type of loans just to pay off the basics, you are really to the point where you need to begin thinking seriously about bankruptcy as an option. What ends up happening the longer you wait is that you acquire even more debt and struggle to pay it back with assets and money you may have been able to hang onto otherwise.

The largest demographic of payday loan consumers, according to the study, are white females who have jobs and are between the ages of 25 and 44.

Some other characteristics of the typical payday loan user are:

  • Earn less than $40,000 a year;

  • Are separated or divorced;

  • Don't have a college degree;

  • Rent their home.

What makes these loans even more dangerous is that they are now easier than ever to get. First, you rarely have to have good credit in order to be granted one. But more frequently, people are going online to receive their payday loan. It accounts for about a quarter of the market right now. That's been increasing as more states move to ban these predators.

If you feel you are trapped in a cycle of payday loan debt, there is help available.

Orange County Bankruptcy Attorney Vincent Howard at Howard Law can help. You can reach us toll-free at 1-800-872-5925 or send us a message online.

Additional Resources:
Americans Paying Dearly for Payday Loans, By Brian O'Connell, The State Journal-Register

More Blog Entries:
Retirees Increasingly Living in Poverty; Bankruptcy Can Help, July 25, 2012, Orange County Bankruptcy Attorney Blog