Are Debtors’ Prisons Next?

Ah, the perils of unintended consequences. The federal government in the 1990s made direct deposit a default method of paying Social Security and some other benefits. Now “Social Security recipients could now more easily pledge their future checks as collateral for small short-term loans.” And the “payday loan” industry has found a lucrative new niche–“volume has climbed to about $48 billion a year from about $13.8 billion in 1999.”

Responding to the manifest failures of under-regulated consumer finance markets, many are now claiming that predatory borrowing was a bigger problem than predatory lending. I wonder if they’d find predatory “Ms. [Jennifer] Rumph, whose medical problems include severe asthma and two hip replacements,” and who appears to support herself and her children with disability benefits:

After Ms. Rumph fell behind on her payments, Miracle Finance sued her in small-claims court in Abbeville, Ala. Although federal law says creditors can’t seize Social Security, disability and veteran’s benefits to pay a debt, enforcement of the law is scant, and many Social Security recipients are unaware of their legal rights. Lenders and their debt collectors routinely sue Social Security recipients who fall behind in their payments, and threaten them with criminal prosecution, senior advocates say.

Debtors must go to court to prove their case. Ms. Rumph says she didn’t know any of this and was afraid to go to court. Miracle Finance won a $1,500 default judgment in July, and four days later sought a court order requiring Ms. Rumph to appear in person to detail her income and assets.

I suppose some analogue to the “fugitive disentitlement” doctrine might leave hard-liners unmoved by Ms. Rumph’s plight. Nevertheless, the payday borrowing boom in general should lead to reconsideration of exactly what the purportedly narrowing “consumption gap” between rich and poor is actually based on.

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