Visa and Mastercard aren't unhappy with their revenue, but the source of that revenue seems to be shifting.  Debit card use is growing faster than credit use, both giant companies report.  Since my work as an Indiana bankruptcy attorney deals with debt of all types, these trends are especially interesting and important to me as I advise my bankruptcy blog readers and bankruptcy clients.

Debit cards and credit cards each have their uses - and their dangers.  Debit cards are tied to bank accounts.  For consumers who swipe them for purchases exceeding those account balances, fees and late charges can be steep and swift.  Credit card companies have lowered many card holders' limits (because of the many defaults), and swift and steep are the late charges, penalties, and hikes in interest rates for credit card users who abuse their privileges.

The "natural order" of things has been for folks to use debit cards for everyday spending, use credit cards for larger purchases, and then to tap home equity for the very biggest expenditures.  Now, with the fall in home values happening at the same time as rising medical costs, food costs, and fuel prices, the pressure has been in a downward direction. Bigger and bigger purchases are being done with credit and then debit cards.  Very unfortunately, the next step down has been payday loans, a surefire route to ruination (see Who's Paying For All The Ads For Payday Loans - And Why?).

There's often no easy answer for families and individuals caught in a vise of medical costs, job layoffs, and sometimes divorce.  That's why the message I try so hard to convey in this bankruptcy blog is unchanged:  Get help at the first signs of financial trouble.  Things can get better, but, believe me, waiting will lead to nothing but worse.

As a bankruptcy lawyer with one of my four Indiana offices located in the city of Anderson, I'm always alert for news affecting that town.  Anderson has been particularly hard hit by the General Motors pullout, which began in the mid-seventies and accelerated in the 90's, eliminating more than 20,000 jobs.  Many downsized workers, some who faced medical illness along with job loss, ended up filing bankruptcy.  Retail establishments of all types suffered, because there was little money for customers to spend; the entire area was in economic blight.   Some familiar symptoms included increasing numbers of people using expensive debt consolidation services and payday loans.

Today, slowly but surely, Anderson is rebuilding, in large part due to a project called the Flagship Enterprise Center, a collaboration of Anderson University and the City of Anderson.  Flagship is a business incubator and accelerator, using engineers and other experts, many once employed at GM plants and research facilities, to help "host" new companies.  These companies include automotive firms, but also software, medical equipment, and other product lines.  Thirty of these fledgling companies are still housed at the Flagship Center itself, which is off Exit 22 of the I-69 highway.

As a bankruptcy attorney in Indiana, I know how crucially important it is for our state to create new, good-paying jobs.  For debtors emerging from bankruptcy, their getting back on track financially will depend in large part on the availability of jobs that can in turn provide steady, decent wages.  One of Flagship's functions is to help companies recruit and train workers in the newer technologies and businesses that are replacing the old manufacturing plants.  Increased hiring by these new enterprises in turn will mean more money being spent in local stores, beauty salons, restaurants, movie theatres, and furniture shops.  I hope that, over time, employment growth will mean fewer people buying groceries using credit cards or turning to payday loans to tide them over to the end of each month.  I expect it will mean fewer foreclosures and more people buying health insurance, opening bank accounts, and investing in IRAs.   In Madison County, Indiana, as the Broadway song goes, "This could be the start of something big."

Just last month, the Pew Charitable Trust announced a new project.  The goal – to promote bank accounts for moderate-to-low income households.  Pew wants to help new, young depositors get started in banking, as well as people who’ve had trouble affording bank fees, stay away from check-cashing establishments and stop taking out payday loans.

In an earlier blog, Who Really Gets Paid On Payday Loans?, I explained that these loans are extraordinarily expensive for borrowers.  The Pew study estimates that “alternative financial services businesses”, including check-cashing establishments and payday lenders, are estimated to charge full-time workers an average of $800 per year in interest and fees, (often on a rotating balance not more than that number!).

As a bankruptcy attorney and consumer bankruptcy specialist for close to twenty five years in Indianapolis, I applaud the Pew effort.  Promoting safe financial services is more important than ever today. I see that people are having trouble covering food and gas prices and can’t spare money for fees to cash their paychecks!   In my bankruptcy law offices, I deal with people’s income and expenses every day.  One important part of my work in helping clients prepare to file bankruptcy through the Indiana court system is to assist them in organizing all their financial records, showing all their income and each category of expense.  Overall financial counseling and specifically debt counseling are an everyday aspect of my interaction with people in my four bankruptcy law offices.

I always advise people, when they pass signs advertising payday loans, to drive on by.    Once the Pew Safe Banking Opportunities Project is complete, I’ll be able to add, “Keep driving all the way to the bank!”

OK, you've been reading my bankruptcy blog, and now you know that one of the worst kinds of loan you can have is a payday loan.  You've passed up every online offer of cash to "tide you over until payday", and you've driven right by all the street signs advertising fast cash.  But don't relax your guard yet, because there's another kind of everyday loan that needs a firm "No, thank you!" from you.

Banks call these loans "overdraft protection", but a good name would be "bounce loans", because they prevent your check from bouncing in the event you overdraw your account.  Sounds great, doesn't it?  Actually, no.  In fact, consumer groups have been investigating these loans lately, because they can turn out to be even worse than payday loans, with triple-digit interest rates and charges.

You go to your ATM for a cash withdrawal, or you're using a debit card for a purchase.  The problem starts when you withdraw more - or buy more - than the balance in your account.  Even if you've gone over by just a dollar or two, banks have been charging penalty fees as high as $20 or even $35 per incident, plus $2 to $5 per day the account is overdrawn!  An overdraft loan can be triggered by writing a check for more than your balance, but in practice, more than half of
bounce fees are triggered by debit cards or at an ATM.  Many banks don't have a warning system that tells you that you've gone over your limit, which is what the consumer groups are asking for.  On a $100 overdraft, with a $20 fee and two weeks' time until a deposit brings the account back to a positive balance, the APR (annualized interest rate) would be a whopping 520%!

As a bankruptcy attorney in Indiana for almost twenty five years, I work with people who have real financial problems.  Most of these families or individuals are driven to the point of bankruptcy by some combination of factors that are mostly beyond their control, big things, such as extended illness, job loss, or divorce problems.  I just hate to see situations made worse by debts that could have been avoided.  Bounce loans would certainly be near the top of that list!

Last week in this blog I wrote about how the Pentagon views soldiers and sailors who are deep in debt as security risks.  For this reason, the Pentagon is not clearing certain enlisted men and women to serve overseas.  As a bankruptcy attorney in Indiana, my reason for focusing on this topic was that I had read that most of the high debt load weighing down military families started with payday loans.  (The 2007 Military Authorization Act made it illegal for creditors to grant payday loans and car title loans to members of the military, but that law did not affect the many loans already in place.)  As a consumer bankruptcy specialist dealing with thousands of people each year, I know that payday loans are almost never a good thing for borrowers, and I wanted to emphasize that again in the blog.

Well, interestingly, I just received a note from a friend who is a financial planner.  It seems the Foundation for Financial Planning  started, just one month ago, to visit Marine bases around the country, presenting financial planning programs.  These Moneywise courses are specifically aimed at teaching Marines and their families about money management.  The most fascinating thing from my point of view was that the volunteer financial planners found, while visiting the bases, that nearly 30% of all enlisted Marines have financial problems serious enough to affect their security clearances!  In a bulletin put out by the Foundation  asking for charitable pledges to support the education program, it was mentioned that some military jobs are going unfilled, which of course jeopardizes individual careers in addition to posing problems for our country's security.  The article specifically mentioned pay day lending loans and maxed out credit cards as playing a large role in the problem.

I've said it before and I'll say it again: Even if filing bankruptcy is not the best choice in a given situation, there are more productive ways to deal with money problems than payday loans!

We may all agree we owe our troops a debt of gratitude, but the Pentagon has had to worry about debts of a more tangible sort that affect soldiers' ability to do their jobs. 

As a bankruptcy attorney in Indiana, I'm always reading up on money-related issues in order to be better prepared to help my bankruptcy clients.  But even I was shocked to read a Pentagon report published two years ago about how loan centers near military bases were charging military families exorbitant interest rates to borrow cash.  A new law had to be passed in 2007, the 2007 Military Authorization Act, making it illegal for creditors to grant payday loans and car title loans to members of the military.

I've written in earlier blogs about the dangers of payday loans, and how such loans are almost never a good idea for any borrower.  Now I learn that the problem with payday loans to soldiers and sailors had gotten so severe that some recruits were not given security clearance to go overseas, solely based on the amount of debt they were carrying!  Referring to high interest payday loans, the Pentagon report said, "Such lending hurts morale and adds to the cost of fielding an all-volunteer fighting force." In a New York Times article, a navy captain was quoted as saying, "The last thing you want is a young sailor programming a Tomahawk missile in the Persian Gulf who is worrying about whether his car is being repossessed back home."

Before the 2007 law was passed, it's estimated that almost 200,000 military families were entrapped by high-cost payday lending each year!  The problem was considered so severe and so pressing that the Department of Defense listed payday lending as one of the top ten key issues impacting the qualify of life of U.S. military personnel!

A couple of months ago, in "Payday Loans - Debt Help or Debt Trap?" , I explained that in my bankruptcy law offices in four cities in Indiana, I often meet with people who have tried every form of loan there is, including payday loans, and that without question, the payday loans have come at the greatest cost to borrowers.  I want to stress again here: even if filing bankruptcy is not the best choice in a given situation, there are more productive ways to deal with debt than payday loans!   Before you turn in at the "PayDay Loans Here" sign, or click on the next online offer for a payday loan, please talk with a debt professional to explore better options..

In recent days, I've used a good deal of space explaining the dangers of payday loans, and the unbelievably high interest rates those kinds of loans carry.  Meanwhile, we're all being bombarded with offers and advertising for payday loans.  The loans are done out of payday loan stores, check cashing shops, and pawn shops, in addition to the ton of business being done through advertising over the Internet.  Somebody must be finding it worthwhile to spend all those marketing dollars!  You bet!  Industry analysts estimate annual payday loan volume at close to fifty billion (yes, with a "B") dollars a year, done out of almost 50,000 different outlets.  As a bankruptcy lawyer in Indianapolis, I find the most frightening statistic to be this: consumers are paying over $6 billion in loan fees for these payday loans!  Wow!  I can think of better ways to spend six billion dollars, can't you?

If payday loans are so awful, then why is the payday loan business so successful?  The reason is very simple.  All a consumer needs to get a payday loan is an open bank account, a steady source of income, and identification.  There's no credit check conducted, and no questions asked to determine if a borrower can afford to repay the loan. That fact alone should alarm borrowers ("Just why am I being lent money without assurance I can pay it back?") and make them realize payday lenders want people to be late so they'll incur all those penalties and fees!  

Indiana regulates payday lending to a greater extent than in many other states, but we still have a long way to go to protect borrowers.  Play a game as you're driving down some of the major streets in Indianapolis - see how many check cashing facilities and payday loan signs you can spot.  Then, drive on by.  If you need help managing debt, don't pull the key out of the ignition of your car until you've reached the office of an attorney who specializes in consumer debt.

It's hard to drive down a city street or log on to the Internet without seeing an ad for payday loans.  The way payday loans work is that a borrower writes a personal check (or sometimes signs over electronic access to a bank account) for the amount borrowed plus the finance charge.  The borrower gets cash now, but the lender waits until the borrower's payday to cash the check or access the account.  Our state of Indiana is one of thirty seven U.S. states in which payday loans are legal.

As an Indiana lawyer for bankruptcy, I often meet with people who have tried every form of loan there is, including payday loans.  Without any question, the payday loans have come at the greatest cost to the borrowers.  Just to give you an idea, a $300 cash advance on a credit card paid back after one month might have an annualized interest rate of 57%.  But, awful as that is, the payday loan is much, much worse.  That same $300 on a 14-day payday loan renewed once for another 14 days would carry an approximate rate of 260% annualized interest!  And that doesn't count any late payment or non-sufficient funds penalties. 

Of the states that do allow payday loans, Indiana is one of the more "restricted" states in terms of its rules about payday lending.  Payday lending is regulated by the Indiana Department of Financial Institutions.  A few of Indiana's rules are that the maximum loan amount is $550 (or less, because the amount can't exceed 20% of the borrower's monthly gross income), that the maximum finance rates are 10-15% (varies by the size of the loan), and, most important, no rollovers permitted (you can't renew or refinance).

Besides the punishing high cost, one aspect of payday lending I see that gets many people in trouble is accepting offers through the Internet.  Consumers applying for payday loans online or via fax need to worry about security and fraud risks in addition to the financial risk.  But even if the lender operates totally within the law, and no one hacks the information, payday loans are a terrible danger to people's financial health.  Let's face it - anyone who's reached the stage of not being able to pay the next two weeks' living expenses without borrowing money needs to get off the merry-go-round now, halt the downslide, turn off the pressure from creditors, and get to a professional adviser's office fast!

Even if filing bankruptcy is not the best choice for a given situation, there are more productive strategies for dealing with debt than payday loans.  Believe me, after almost twenty-five years of working with tens of thousands of debtors and their families, helping them rebuild their financial lives, I know about  payday loans.  I have three words to say:  "Don't Go There!"

Drive down the street, turn on the radio or TV, log on to the Internet – you’ll find them everywhere, those ads for payday loans.  Sounds like such a great service, giving you just enough cash to tide you over until your paycheck comes. The way these loans usually work is that a borrower writes a personal check payable to the lender for the amount of the loan plus an extra fee.  These loans, by the way, can also be called cash advances, check advances, or deferred deposits, but all the names add up to just one thing – very, very expensive cash.  

As a bankruptcy attorney in Indiana, believe me, I see more than my share of payday loans – and I see some very sad results. Cash advances like this are a good example of getting the least benefit at the highest cost. 

You do the math:  All you want to do is borrow, say, $200 for the next two weeks, just to pay a bill so the creditor will stop harassing you or so your landlord will stop making your life miserable.  Maybe you want to do some pre-holiday gift shopping while the sales are on. To get the $200, you write a check to the cash advance people for $230.  They agree to hold the check until your next payday in two weeks.  Even if you don’t “renew” or “roll over” that loan after two weeks, you’ve just paid 15% for two weeks, which amounts to a whopping 391% Annual Percentage Rate on your money! 

The reason payday loans end up being so profitable for the lenders – and so disastrous for the borrowers – is that many people don’t end the game in two weeks.  They ask for an extension for another two weeks.  Roll over a loan like that three times, and you would end up paying $120 to borrow $200.  Talk about “rolling”! People’s finances roll downhill pretty fast at that rate!

If you’re to the point of taking payday loans just to keep the bills paid – the next stop needs to be the office of an attorney who can give you professional advice and help before things go from worse to terrifying.  And if you’re not yet to that point, but thought a payday loan would be very convenient just now – Please, think again.  They’re the ones getting “paid”; you’re the one getting in trouble. I mean it!