Most loans are for necessities not emergencies
Recent changes in the law leaves the door open for overly aggressive tactics and creates new risks for borrowers who fall on hard times.
One reason Chicagoan’s should steer clear of small dollar, short-term payday type loans is because they can “get you a baloney sandwich in jail,” says Attorney John Lag, Adjunct Law Professor at John Marshall Law School.
If you don’t show up for a hearing, a judge can find you in contempt of court for failing to show up and issue a warrant for your arrest, according to Professor Lag, who teaches Alternative Dispute Resolution in the law school’s new LLM degree program.
The Payday Loan Reform Campaign
The Campaign for Payday Loan Reform began in 1999, shortly after a poor woman came to confession at Holy Name Cathedral and spoke tearfully of her experience with payday loans according to Co-Director Lynda DeLaforgne of Citizen Action Illinois— the state’s largest public interest organization.
Monsignor John Egan assisted the woman in paying off both the loans and the interest, but his outrage towards the unscrupulous lenders had only begun. He immediately began calling friends, organizations, and associates to try to challenge the financial predators.
“Let me be clear,” said DeLaforgne, “we worked for 10 years to pass a state law on payday lending to crack down on the worst abuses and that law went into effect in March 2011. It’s in effect now and we are still getting back initial data to see how it’s working.”
Predatory Financial Services Leads to Instability
Predatory financial services like payday loans are also on the radar of Chicago Mayor Rahm Emanuel who, in December 2012, issued a press release stating that their business practices lead to higher bankruptcy rates, higher crime rates, lower credit scores, and overall financial instability.
Last year overly aggressive debt collection tactics of having borrowers arrested in small dollar consumer debt cases garnered the attention of both Illinois Attorney General Lisa Madigan and Governor Pat Quinn.
As a result, the law was changed to mandate personal service (or abode service) before a warrant can be issued and a borrower jailed for non-payment of debt. But is the personal service mandate really enough protection?
The Changed Law Is Oppressive
Unfortunately, the new law which was supposed to protect the consumer also included a newly required income and asset form “which is really oppressive” according to Professor Lag.
“Now, you have to give them income and asset information, it’s really unbelievable—it’s like identity theft 101,” said Lag.
Problems with the newly mandated income and asset form include:
• Judgment debtors are required to disclose birth date and specific banking account information; • Judgment debtor’s financial disclosures may become public record;
• Judgment debtors have no control over who obtains their financial information;
• Collection lawyers potentially could trade judgment debtor’s information with others in the industry.
“To me, it’s oppressive and if you don’t comply, they’ll hold you in contempt” and have you indeterminately held, explains Lag, with compliance becoming the key to the jail cell.
It’s a Cycle of Poverty
Christopher Vargas, a financial coach at the Jane Adams Resource Corporation sees the human impact of predatory lending on a daily basis. He helps individuals and families to improve their financial health and transition out of poverty.
Mr. Vargas believes that the practice of marketing payday loans as a short term solution “in reality becomes a long term problem that perpetuates the cycle of poverty.”
Supporting Mr. Vargas’ view is a recent study published by The Pew Charitable Trusts titled “Payday Lending in America.” The study found that the profitability of payday lenders depends on repeat borrowing.
Despite policy maker’s knowledge that the industry’s profitability depends on repeat borrowing and misuse of their financial products, these financial products continue to be marketed as short-term solutions for emergencies.
Vargas says, “In my financial education classes, I talk about solutions for short term financial needs and I cover payday loans.”
I have clients who’ve gotten payday loans and the reason why I learned about them is because I check their credit and I see those judgments. Vargas typically asks, “Where is this judgment from?”
“Well I got a payday loan, I wasn’t able to pay it” his client’s say. So he’ll ask, “What was the amount?” And they’ll tell Vargas, “Well it was a few hundred dollars.” In this reoccurring scenario Vargas asks, “How can it get to be so high?”
The clients who actually know about their judgments will tell Vargas about the interest and penalties and how creditors had threatened to sue them and that they couldn’t do anything so the loans became judgments.
Mr. Vargas also says, “that sometimes collection agencies use abusive tactics –intimidating tactics—and once legal action begins and ends in a judgment you have the possibility of wages being garnished” or worse. Vargas says, that “after a setback people have a difficult time trying to get their financial life back together.”
What Vargas sees, for the most part, are “people who’ve become unemployed or are underemployed and can’t pay their loans and also people who become homeless.” When people are forced to move or become homeless, not getting notice of a court date or a judgment can also be the beginning of a nightmare.
Judgments Can Still Become Arrest Warrants
Neither the Illinois Creditors Bar Association nor legal aid lawyers have actual numbers on how often people are arrested and jailed because they were unaware of a civil judgment that went to warrant.
A call and message left for Tinley Park debt collection attorney Kenneth J. Donkel was not returned, so it is not known how many, if any, of the more than 50 cases filed in Cook County on behalf of PLS Check Cashiers since January 2012, have resulted in default, warrant and then arrest.
Let’s start at Article I of the Constitution of Illinois, the Bill of Rights” began Lag. “The intent is to protect citizens from an overreaching government,” said Lag. “No person shall be imprisoned for debt unless he refuses to deliver up his estate.” So, while “they say there is no debtor prison, if you don’t follow the Court’s instruction then you can be put in jail” emphasized Lag.
Illinois Attorney General Lisa Madigan believes that it’s disingenuous for collection attorney’s to suggest that people are being jailed for contempt of court rather than being thrown into jail for a debt according to a statement given The State Journal-Register.
Being jailed for debt was outlawed in the 1800’s following an armed uprising, named after Daniel Shays, a veteran of the American Revolutionary War who, with other war veterans, shut down county courts to stop judicial hearings for tax and debt collection during the post-war economic depression.
Most Judgments Are Defaults
“The mass collection people do schlock work generally” says Attorney Lag. “What you can find if you go through these cases is that there are massive amounts of misstatements and incorrect forms.”
“The vast majority of collection case judgments come by way of default” Lag claims. Many times the more aggressive collection firms won’t do much with the judgments until after 30 days. “Generally, they wait because they want to make the judgment more uncontestable” Lag says. “As a practical matter too, why do it if you want to collect the money?”
“So you can call it whatever you want, jail is jail” said Lag, who has practiced law here in Chicago for more than 30 years. “When the jail cell closes and you’re the one on the other side of those bars, you don’t care if it’s criminal or civil. You’re eating baloney sandwiches and can’t go home.”