Tag Archives: California

How Can 1,000 Percent Interest Be Legal?


Interest rates are capturing my attention more and more these days. One human being pays less than 3 percent interest to borrow money while another human being agrees to pay 1,000 percent interest. Loan sharking is perfectly legal again. Just look at payday loans, cash advances and the title loan lending industries. They are horribly expensive to borrow money from and I can tell you for a fact they will violate the Fair Debt Collections Practices Act when trying to collect for nonpayment. Our government is asleep at the wheel on this issue. Why are we allowing people to be charged unconscionably high interest rates to borrow money that were intended to be illegal? Society as a whole deemed charging such high interest rates bad for society and passed usury laws to limit how much interest can be charged. The theory is that those in financial stress need to be protected from themselves to a certain extent. They may not be thinking clearly given the stress they are under which makes them ripe to be taken advantage of. Unfortunately there are exceptions to exceptions in most states that allow this horrible interest rates.

What A 132 Percent Interest Loan Looks Like Other Than Just Horrible

The 132 percent interest loan was the result of a title loan. The borrower turns over to the lender their pink slip to their vehicle and the borrower is given a loan with the vehicle as collateral. This is a non-purchase money security interest loan for those keeping score out there that know what a PMSI loan is. If not, please Google “purchase money security interest” to find out why PMSI is a good thing for you and your finances, especially if you own real property (house or land) in California. Given the loan is secured by collateral you would think the loan is not a high risk loan and the interest rate would be reasonable. The 132 percent interest says otherwise though. So this 132 percent interest loan was for the principal balance of $18,000 and a term of three years or 36 months. The collateral was a vehicle worth good money still, a Toyota Sequoia. In addition to the 132 percent interest there was a prepaid finance charge to be paid upfront of $1,800. So this person actually only borrowed $16,200 since they had to pay $1,800 upfront. The kicker is they are paying interest on the full $18,000. Horrible.

The monthly loan payment is $2,046.19. What? That is a mortgage payment not a vehicle loan payment. Each year the borrower will pay $24,554.28 to the lender for the original borrowed $16,200. The total amount due on the loan if each payment were made during the three years is $73,662.84. I have no idea why the borrower needed $16,200 so bad they were willing to pay it back 4 times over and I did not ask. All I know is this loan should be illegal.

California Law And Title Loans

California is considered a loophole state. This borrower would end up paying back the original $16,200 borrowed 4 times over. This is criminal and illegal right? Wrong. There are limits or caps on interest for title loans in California for loans of $2,500 or less. So what do title loan lenders do in California? They only do title loans in amounts above $2,500 so that the California Usury Laws do not apply. Nice. So when the title loan company employee wants you to add $500 to your title loan to bring the amount borrowed over $2,500 it is to allow the title loan company to charge you a higher interest rate. They are not looking out for your best interest.

The 132 Percent Loan Is Not Much Different Than Carrying A Balance On A Credit Card

Almost every one of our clients expresses some sort of guilt at some point in the process of filing for bankruptcy protection. Most of the time there is absolutely no reason to feel guilty. There is actually no loss of money by those discharged in the bankruptcy case. How you can that be you ask? If someone is discharging $30,000 in debts then someone or a company out there lost money. Nope. Wrong. Not a true. Most of our clients have been making payments for years and years before there is a problem or seek bankruptcy protection to legally discharge their debts. All that interest accrues and gets paid. So the principal borrowed gets paid back and what is left to pay is the ongoing interest fees from carrying a balance on the card each month. For example let us say you purchased a TV at Costco, a 60’ Samsung for $2,500 on your Discover Card with an interest rate of 20%. To pay off the debt in 12 months you would have to make a minimum payment of $232 a month for 12 months, total payments of $2,784. The credit card company only gets $284 in profits. A more likely scenario is repayment will take three years or more. If the balance of $2,500 with 20% in paid off in 48 months or four years the monthly payment will be around $77 a month, total payments of $3,696. There is about $1,196 in interest profit to be made and the principal amount borrowed? It was paid off on month 32. So if this person retains a bankruptcy attorney and files for bankruptcy protection after 32 months or more of making payments Discover Card will only have lost gross profits from an interest rate that used to be illegal.

The Good News Is There Is Another Loophole To Help Title Loan Borrowers

This is kind of good news. That bad news is the loophole is in filing a Chapter 13 bankruptcy case. When reorganizing debts in Chapter 13 bankruptcy lawyers can have their clients only payback the fair market value of the vehicle collateral. Not what is owed according to the loan terms. So in the example above if the borrowers Toyota Sequoia is only worth $12,000 in the real world that is what the borrower will pay at around 4.75% interest. So not only can we reduce the principal amount owed, but we can reduce the percentage rate too. Filing Chapter 13 would allow the borrower in our example to pay back the loan and get the pink slip back at $210 a month for 60 months, the length of the Chapter 13 Plan. What a massive savings and the lender actually loses nothing. The lender just loses the gross profits resulting from what should be an illegal interest rate to begin with.

Creditors Garnishing Wages in California


Yes, creditors can garnish wages in California. But can two creditors garnish your wages at the same time? The answer appears to be no. California Code of Civil Procedure Section 706.230(c) provides that an employer is to honor or comply with the first earnings withholding order served upon the employer. So what if your employer receives an earnings withholding order that was to withhold $50.00 from your check each pay period to satisfy a judgment totaling $20,000 and then your employer receives another withholding order that is attempting to withhold from your earnings the full statutory allowed about of 25%? According to CCP §706.023(c) your employer should return the second earnings withholding order as ineffective given that they have to honor the first earnings withholding order and start the wage garnishment at $50 a pay period.

What is the effect of this? To satisfy a $20,000 judgment at $100 a month, assuming the person is getting paid twice a month and $50 is withheld each check; it will take approximately 200 months or about 16 years to satisfy the judgment of the first earnings withholding order. So it would appear that a debtor could collude with a friendly creditor to have his wages garnished at a very low amount and thwart any other attempts to garnish their wages until the first earnings withholding order is satisfied and released levying officer.

The Ninth Circuit Bankruptcy Appellate Panel had to address this issue in a 2007 in the bankruptcy case of In re Tiffany, Bankr. Case No. 93-58255. In this case a creditor of the debtor obtained a judgment against the debtor for a not dischargeable debt totaling $1,147,054.79. The creditor then tried to garnish the debtor’s wages, but another creditor had already served an earnings withholding order on the debtor’s employer. The employer returned the earnings withholding order to the creditor as ineffective and the creditor litigated the issue all the way to the Ninth Circuit Bankruptcy Appellate Panel.

The opinion is not for publication though and can only be used for persuasive purposes. Nonetheless, the Ninth Circuit BAP held that the statutory language is not ambiguous and it clearly says that an employer has to comply with the first earnings withholding order received and return the second as ineffective.

In the Tiffany case the creditor also tried to argue that given that the first creditor only ordered $50 per check to be withheld that leaves plenty of disposable income of the debtor for them to garnish wages of the creditor. Again, the court held that this does not matter pursuant to the plain language of CCP §706.050. This section clearly says to withhold earnings pursuant to CCP §706.050 or such other amounts specified in the earnings withholding order. In this case a mere $50 per paycheck even though the debt could arguably afford to have much more withheld.

The legislature could change the law regarding this issue at any time to prevent this result. There also could be equitable remedies pursued to prevent this result also. This article is only addressing when two creditors seek to have your wages garnished close in time and does not address when a taxing authority or other entity issues an earnings withholding order along with a normal judgment creditor.

Improper Service of Summons and Complaint in California


Unfortunately more than a few times we have had potential clients come to us and describe how they were improperly served with a summons and complaint in a California State court lawsuit. They are usually not personally served properly or the substitute service was not completed properly. California Civil Procedure Section 415.20 provides the proper forms of service. For some potential clients this is all irrelevant since they have other debts too that need to go away as well and seeking the counsel of a bankruptcy attorney to file bankruptcy and just make it all go away once and for all.

The problem is if you do not know about the lawsuit how do you defend it? The answer is you do not defend it and a default judgment is usually entered against you. The default judgment is then enforceable and attorney fees and costs can be added to the original amount of the debt plus interest will start to accrue. A $4,000 default judgment can turn into a $8,000 default judgment real quick.

As a practicing bankruptcy lawyer this is troubling. What is even more troubling is when the lawsuit was filed more than five years ago and the potential client did not even know about the lawsuit until their bank account was levied on or the creditor attempts to garnish their wages. So what can be done to combat this?

First a motion to quash the service of the summons and complaint should be filed and a motion to set aside the default judgment. California Civil Procedure Section 418.10 governs motions to quash or overturn the service of the summons and complaint because service was improper. The default judgment should be therefore be void and set aside or overturned. Unfortunately you will have to pay the appearance fee which will be at least $255.00 or more depending upon if the case is a limited civil case or an unlimited civil case. This is a special appearance and not a general appearance. A general appearance in a case will provide the court jurisdiction over the party making the appearance. This is a key point. The special appearance is only to bring to the attention of the court that you were not served properly so the default judgment is void. You will have to prove by a preponderance of evidence the service of the summons and complaint was not proper.

Next step in getting rid of the case or having it dismissed gets tricky. California Civil Procedure Section 583.210 provides the summons and complaint shall be served upon a defendant within three years after the action is commenced against the defendant. The party suing you must serve you within three years of the case being filed or bring it to trial within five years. Both of these time restrictions can be tolled. Tolled means that the clock does not tick on the amount of time from the date the case was filed. There have been a number of cases litigated on whether the clock should be ticking or stopped and allow the party suing you more time to either serve you properly or bring the case to trial. Whether the court will dismiss the case outright could be challenging.