My husband took out an online payday loan and he defaulted, they have now sent it to a collection agency that says we have to come up with over a $1000 or they will start criminal charges. Can they do that? I live in Missouri.
These small loans, also called "cash advance loans," "check advance loans," or "deferred deposit check loans," are a frequent pitfall for consumers. A fee anywhere from $15-$30 per $100 borrowed is charged for an average loan of $300. The borrower will give the lender a post-dated check, which the lender later uses to electronically transfer a payment or the entire balance of the loan from the borrowers account.
An especially insidious practice is to withdraw a partial payment from the account as a "customer service." This partial payment becomes a perpetual installment that continues despite the borrowers' best efforts to halt it.
With rates so high and the term of the loan so short there is no wonder that a very high percentage of these loans are rolled over by the borrower again and again so that the accumulated fees equal an effective annualized interest rate of 390% to 780% APR depending on the number of times the principal is rolled.
The Federal Trade Commission offers a great Web page regarding payday loan alternatives.
A payday lender may attempt to collect the balance itself. If the borrower defaults, the payday lender may sell the debt to a collection agent, which we discuss later.
If the payday lender (or collection agency, for that matter) cannot convince you to pay through standard collection tactics, such as phone calls and letters, the payday lender may decide to file a lawsuit against you to obtain a judgment for the balance of the debt. If the lender sues and obtains a judgment against you, it can then take steps to enforce the judgment as allowed by your state law in civil court. The most common methods of enforcing a judgment are wage garnishment, bank account levies, and property liens.
Note that not on this list of enforcement actions are calling your employer, contacting your neighbors, or getting a warrant for your arrest. Failing to repay a debt is a civil matter and not criminal. A common threat many payday lenders use is arrest for check fraud: This is a groundless threat unless the payday lender has evidence to prove the borrower never intended to repay the payday loan. Proving that is very difficult. Remember, no one has been arrested or imprisoned for debt in the United States since in the Civil War.
To learn more about debt collection laws in your state, see the Privacy Rights Clearinghouse Debt Collection Law Guide.
If the payday loan company sells an account to a collection agent, the borrower is now obligated to repay the balance to the collection agent.
A federal law called the Fair Debt Collections Practices Act (FDCPA) states that a third party collection agent must stop calling you if you notify them in writing to do so. Several states, such as California, New York, and Texas, extend many of the regulations in the FDCPA to cover original creditors as well. See Advice If You’re Being Harassed by a Collection Agent to learn what actions you can take if you believe a collection agent is violating the FDCPA.
If the payday loan company sells the account to a collection agent, the debtor can stop the telephone calls by sending a cease communication demand letter, commonly called a cease and desist notice, to the collection agent. (See the Bills.com debt self-help center for sample cease-and-desist letters.)
Many payday loan collectors use intimidation to strike fear into borrowers. Just because a person is in debt does not mean that person loses their rights as a consumer.
As mentioned above, many payday lenders require borrowers to provide their checking account numbers so that payments can be withdrawn from the borrowers' accounts automatically using the Automated Clearing House (ACH). In instances where the borrower accounts lack sufficient funds, the payday lender will continue to attempt withdrawals. This may create overdraft charges for the borrower, and if done often enough, the bank may close the borrower's account.
One common tactic to deal with payday lenders who repeatedly withdraw funds from a borrower's account is for the borrower to close the account and reopen another at the same bank. This is effective unless the bank links all transactions from the old account to the new one. If that happens, when the payday lender makes a withdrawal, the bank simply reaches into the new account to remove the funds. The lesson here is to make sure the bank does not allow electronic withdrawals from the old account to be transferred automatically to the new account.
Once the account is closed, the borrower can create and negotiate a repayment plan with the lender. However, in Missouri it is a violation of state law to write a check on a closed account. See the discussion below to learn more about Missouri law.
Under Missouri law, unsecured "payday" loans must be made by a licensed lender, shall be a minimum of 14 days and an a maximum of 31 days, cannot exceed $500, and cannot be charged more than $75 for a $100 loan. Incidentally, the APR for a $100 loan for 14 days and a $75 fee is 1980%. A payday loan can be rolled-over a maximum of six times in Missouri. The borrower must reduce principal amount of loan by 5% or more upon each renewal. The lender is prohibited from making a series of ACH transactions to collect a single check.
It is common for collection agents working for payday lenders to suggest that a person who defaults on a payday loan can be prosecuted under the state's criminal law. Missouri § 570.120 1(1) in part states "with a purpose to defraud the makes, issues or passes a check or other similar sight order or any other form of presentment involving the transmission of account information for the payment of money..." In other words, it is a crime in Missouri if the payer writes a check on a closed account, or if the account was closed between the time the check was written and the agreed upon date of presentation of the check.
However, Missouri § 408.505 states that a payer does not commit the crime of passing a bad check if at the time the payee accepts a check there are insufficient funds on deposit at the time of acceptance if both parties agree the payee will present the check later.
If a Missouri payday lender is making repeated ACH withdrawals to secure repayment for a loan, that lender is in violation of Missouri loan. If a payday loan debtor closes an account before the payment is made, the debtor may be in violation of Missouri § 570.120. However, it is unclear if the debtor is in violation of § 570.120 if the debtor closes the account in response to repeated ACH withdrawals, or after the debtor has made some payments to the creditor with that account. Debtors in this situation should consult with the Missouri Division of Finance, file a complaint, and also consult with a Missouri attorney experienced with consumer law for guidance.
To learn more about Missouri lending law, see this matrix of Missouri laws regarding consumer loans. See also Missouri's Payday laws and regulations - quick reference guide document.
To learn more about tactics and strategies for dealing with creditors, read the Bills.com article Debt Negotiation and Settlement Advice.
Bills.com also offers more information on the Payday Loan Information page, and has answered reader questions about payday loans in California, Massachusetts, New York, Florida, Texas, Illinois, and Virginia.
If you do not repay a payday loan, the payday loan company has several legal remedies, including wage garnishment, levy, and lien. See the Bills.com resource Collections Advice to learn more about the rights of creditors and debtors.
See also the free Bills.com Financial Planning and Budget Guide, which can help you manage your finances and you can learn about budgeting and prudent financial management.
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