5 Scams and Rackets That Can Turn You Into a 21st-Century Indentured Servant
America is a debtor nation in crisis. According to one estimate, total consumer debt stands at $11.7 trillion, including $8.2 trillion in home mortgages, $1.1 trillion in student loans and $854.2 billion in credit card debt. While the banks were made whole from the Great Recession, ordinary people, especially homeowners who lost their houses, got screwed. And the faltering recovery has only left ordinary Americans worse off. Wages are flat and consumer spending is sluggish; home foreclosures are declining but there were still 1,361,795 foreclosures in 2013; consumers are shifting to a cash-and-carry system, adopting bank debit payments, and cutting back on the use of credit cards. More and more Americans are fighting to stay out of the debt hole, though the average U.S. household is already carrying $203,000 in debt.
This crisis has deep historical roots, and the federal government has taken important steps to curtail it. In 1867, the U.S. Congress passed the Peonage Abolition Act, ostensibly ending indentured servitude. A century-plus later, the Supreme Court ruled in Bearden v. Georgia (1983) that courts cannot imprison a person for failure to pay a criminal fine unless the failure to pay was “willful.” Yet today, failure to pay a parking ticket can trap you in a life of peonage and even land you in jail.
While the economy continues to stutter along, the peonage industry—what used to be called usury—is growing. More troublingly, it is targeting the most vulnerable segments of our population; the poor, the working class and the elderly are being remorselessly squeezed. Here are five ways the peonage industry is creating a new, 21st-century form of the old-fashioned debtors’ prison.
1) Defaults for Profit
A recent report by Fox Business noted that the Carlyle Group, a huge private-equity investment firm, was assessing its entry into the student loan racket. With more than $1 trillion in student debt outstanding, they see an opportunity to make some easy money. Carlyle is looking into acquiring student-loan collection agencies—companies that go after students who have defaulted on their loans.
According to the U.S. Department of Education, federal loans enter default when payments are more than 270 days past due. Its most recent data (for those beginning repayment in 2010) indicates that the student college default rate is at nearly 15%.
An estimated $121 billion of the $1 trillion in student loans is 90-plus days delinquent. Industry experts peg the profit margins for collection agencies at roughly 30%, as opposed to the loan servicers earning roughly 20%. According to one source cited by Fox, “collection agencies can earn 10% to 15% of the entire loan balance.” These companies are estimated to receive about $1 billion annually in commissions.
When an individual is in default, collection agencies can garnish up to 15% of his paycheck and seize his Social Security, disability income, and federal and state income tax refunds. They can also add collection fees to an outstanding debt—and that’s where Carlyle sees the opportunity.
While people who default on their student loans cannot be arrested, unscrupulous debt collectors often threaten those in default with criminal prosecution and jail time. Equally troubling is the fact that a growing number of students who have taken out super-sized loans now find themselves trapped in low-wage jobs with their future prospects looking dim. For them and many others, the American Dream is turning into a nightmare.
To help address the student debt crisis, President Obama recently introduced a “loan forgiveness plan” for those who’ve made regular payments for a minimum of 20 years. In addition, the administration cut the commissions paid to private collection companies to 11% from the previous 16% fee.
2) Probation Purgatory
More than 1,000 courts throughout the country are sentencing hundreds of thousand of Americans charged with misdemeanor offenses to probation, but it is probation with a kicker. According to a revealing study by Human Rights Watch, these misdemeanor offenders now become indentured servants to for-profit corrections companies.
With local and state government coffers empty and the high costs of maintaining the “three-strikes-lock-‘em-up” policy, courts are outsourcing probation to private companies. These companies ostensibly supervise the offender and serve as collection agencies for fines and court costs, as well as the fees they tack on for services rendered. As HRW notes, “Often, the poorest people wind up paying the most in fees over time, in what amounts to a discriminatory penalty. And when they can’t pay, companies can and do secure their arrest.”
A recent New Yorkerpiece by Sarah Stillman details the painful costs of such programs for poor people. She profiles individuals who failed to pay traffic tickets and end up in the probation gulag owing far more than the amount of the original tickets. Stillman reveals how mismanagement and outright corruption are endemic to the for-profit probation system.
3) Rent-to-Own Racket
Consumer Reports recently asked a telling question: “Would you pay the equivalent of 311% interest to own a big-screen TV?” It then pointed out “Rent-A-Center and other rent-to-own companies tout hot products with appealing payment plans, but their deals are a costly way to buy appliances, electronics, and furniture.”
About 6 million Americans annually are suckered into these scams, paying out an estimated $7 billion.
In the old days, companies had layaway plans; they would reserve an item for a customer who would contribute small, regular sums until she had completed all the payments necessary to pay for the item and take it home. By the 1920s, companies began offering installment plans, in which one bought a car or TV set and mailed in one’s monthly payment. The earliest single-purpose charge card emerged in the late ‘20s, and in the post-WWII era, the general-purpose credit card took off. In 2013, there were approximately 156 million credit card holders in the U.S.
For those with low credit ratings, rent-to-own outlets offer all sorts of household big-ticket items, like TV sets or furniture. These retailers gouge needy consumers by charging substantially more than the actual value of the product. Worse, those who fail to meet their contractual obligations often get harassed or even arrested.
Recently, Lauren Clarke, 30, from Pottstown, PA, was arrested for failing to pay $5,700 in furniture and electronic equipment from a local Rent-A-Center. She was charged with “felony theft by deception, felony theft of leased property and felony receiving stolen property.”
In Norfolk, VA, Antonio Walker was a passenger in a vehicle stopped by the police. The police ran a background check on him and found that he had an outstanding warrant from a local rental store, ColorTyme. It claimed that Walker was delinquent on payments for a dining room set worth $1,200. He was arrested, fingerprinted and booked.
4) Payday Bandits
There are more than 19,000 payday loan outlets in the U.S. According to a 2012 Pew Charitable Trust study, payday loans average $375, have a term of about two weeks, and carry an average fee of about $55. Most borrowers use their loans to cover recurring expenses like utilities. Making matters worse, the average borrower takes five months to pay the loan and spends $520 on finance charges.
Payday companies target the poorest people and charge exorbitant interest rates. In Colorado the interest rate is 129% and in Idaho it’s 582%. In Louisiana, interest rates are at 435%, 23% of households (57,000) use a payday company and there are more payday lenders (936) than there are McDonald's outlets (230).
The usury rates charged by payday loan racketeers have led a growing number of states to set limits on the practice. About 17 states and the District of Columbia have outlawed or limited them. In Kentucky, payday operators must post a sign that says borrowers will not be prosecuted or convicted for writing cold (or bad) checks or for theft by deception.
5) Squeezing Seniors
One of the cruelest debt scams is targeted at the growing number of elderly homeowners, who are often referred to as “equity-rich but cash poor.” Many are being played by household refinancing scams known as home equity conversion mortgages, reverse mortgages, mortgage equity loans, or simply, equity stripping.
A HECM is a financial instrument available to homeowners 62 and older that allows them to convert the equity in their home into cash. This refinancing tool can be very helpful for people retiring or those living on a fixed income who are confronting mounting healthcare or other unforeseen expenses.
The reverse mortgage is a loan often accompanied by high interest charges and very high service charges. The senior getting the new mortgage often is not required to pay back the loan—and the excessive associated costs—until she moves out of the house or dies. In either case, all costs must come out of the person’s estate, and as often happens, the senior’s heirs will not receive the property.
The FBI reports that between 1999 and 2008, there was a 1,300% increase in HECMs. Fannie Mae reports that in the wake of the 2008 Great Recession, a host of new scams have appeared, including “turn-around mortgages,” where reverse mortgage programs falsely promise to stop foreclosure, and “equity theft schemes,” where seniors are sold a new residence and given a property deed and must obtain a reverse mortgage.
The old-fashioned debtors’ prison immortalized in Charles Dickens’ Little Dorrit is being refashioned to meet postmodern conditions. Those who fall into the sinkhole of debt can look forward to a lifetime of being hounded, threatened, squeezed for every cent, and even jailed for failing to meet an outstanding financial obligation, however minor.