Random idea: If a creditor is about to sell your debt to a debt collector for pennies on the dollar, what if they were forced, by law, to give you right of first refusal?
For example: I owe a credit card company $20k, but I have defaulted on the loan. The credit card company is about to sell this debt to a collector for $1k, who will proceed to make my life miserable. If there were such a law, the credit card company would first have to offer the debt to me for $1k. In this scenario, I could indeed buy my own debt and we all could go on our merry way (except the debt collector).
Aside from the other problems mentioned, one big problem that comes to mind is that, assuming a functional legal system that is able to actually put freezes on debtors' assets, a defaulting loan should always be worth more than what the debtor could pay for it.
Random example with arbitrary concrete numbers: let's say you owe $100,000 and you could afford to buy the debt for $1,000. However, that's also $1,000 available to pay toward your debt. If the creditor can be assured of getting that $1,000, then the debt is worth at least that much. And unless you're completely destitute with no prospects of ever earning any money ever again, it's worth more, because you'll have income with which to pay more in the future.
So in theory, if you can pay $1,000 to buy your own debt, somebody else should be willing to bid at least $1,001.
There's a lot that complicates this (expense and uncertainty of collecting assets through the legal system and such) but it's a thought.
But the OP suggests the debtor gets first refusal.
What I don't get is why, if the lender is going to sell the debt for less that the debt its self, the lender cant offer to settle with the debtor for that amount.
The problem is a social one and motivation to settle in full.
The problem is that it will ultimately lead to the market value for debt to drop even further.
- Lender "A" is owed $20,000 by each of 2 people.
- Debt buyer "B" offers to buy them for $1,000 each.
- Debtor "C" realises that getting out of her own debt for 5c in the $ is a good outcome, and take up the opportunity to buy the debt herself. "A" gets their $1000
- Debtor "D" realises the same thing, but he has no way to pay even $1000 for the debt, so passes up the opportunity to buy the debt.
- "B" ends up buying D's debt for $1000, even though it's now obvious that D has little change of ever paying it back.
B ends up with debt that they can never recover - not even the purchase cost. This leads to B offering less money for this style of debt next time.
The only reason B was willing to pay 5c in the $ on the original debt is because that aligns with their odds of getting the debt repayed.
Once you create a system which filters out the debts of anyone who has the ability to pay back a chunk of their debt, the debts that end up selling to the agencies are the real rubbish loans that will never get paid back.
Well, it seems the primary harm would come to debt collectors who wouldn't be able to buy enough "good" bad debt.
On the other end, no one wants to deal with debt collectors, so it seems that they do provide a disincentive to defaulting. Still, the primary stick they have is the threat of a credit ding, which is there even without the debt collectors. And, with enough such dings, the borrower would no longer be able to obtain credit and perpetually abuse the system/drive debt prices down.
So, in this scenario, the market value for debt would seem more a function of the quality of the borrower in the first place. I generally don't think most people want to default and get dinged for it.
So, it seems that the biggest consequence is debt buyers going out of business. I don't know. I'm starting to have trouble seeing the real downside here!
The market for purchasing debt securities on the cheap is factored into the cost of the debt. So if debt purchasers go out of debt, the interest rates for borrowers, both good and bad, go up.
It's a one way market where the purchasers are replaced (from the debt collectors to the actual owners)
Before: I owe $20k, the bank sells my loan to a debt collector for $1k. He expects to collect 10%, ends up extracting $2k from you. $1k for the bank, $1k for the loan collector, -$2k for you.
After: I owe $20k, the bank wants to get rid of my loan for $1k. I buy it (because my grandma just died and I had the cash) . Bank and I are better off, loan collector gets nothing.
OR bank tries to get rid of the loan, trues to sell it to me for $1k, if that doesn't work they go to the loan collectors. Loan collector buys it, and works out a more fluid payment scheme to try and get back $2k very slowly from me.
If the loan collector can't offer a better service, I don't see their value to society anyways. Apart from subsidizing loans for people by being willing to be the guy who psychologically tortures people in bad situations (who most likely don't know about debt collection laws in place to stop this). In the end we kill off a disgusting system.
Also, this thread was originally prompted by the idea that it would be good for borrowers if they could get a right of first refusal on any resale of their debt. There's a question of whether more selective lending is in the best interests of such borrowers.
As much as being in debt sucks, many of these borrowers would prefer to be in debt than not have had access to borrowed money in the first place. Moreover, this would make life harder certain borrowers who would pay back their debt but can't get a loan because they fall within whatever statistical grouping or heuristic lenders are using to minimize their losses.
>There's a question of whether more selective lending is in the best interests of such borrowers.
It's kind of odd to question whether it's in the best interest of borrowers. I mean, we're talking about the people who clearly cannot pay their debt and thus need it reduced. So, more selective lending would disqualify them and prevent them from getting in over their heads again.
>many of these borrowers would prefer to be in debt than not have had access to borrowed money in the first place.
Again, that's odd. We're not just talking about being OK with debt. We're talking about being so far in debt that they cannot pay. Why should they continue to have easy access to borrowed money? Their preferences aside, that doesn't really work for anyone under any system (including the current).
>this would make life harder certain borrowers who would pay back their debt but can't get a loan because they fall within whatever statistical grouping or heuristic lenders are using to minimize their losses.
The only case that this makes sense for is the case of people borrowing money to access medical services (as per the original article). Though people shouldn't have to get into debt that they have no hope of repaying to access medical services. That's a problem with the health system, not something that fall under the debt market. Ultimately it seems that if you don't pay for health services through taxes, then you pay for it through other means (e.g. paying higher interest rates to the banks when you take out a loan to buy your house)
Actually usually it doesn't. They'll say as an incentive to pay it that it won't go on your credit report.
You can only report past due payments, and outstanding debt. But if you take the offer the debt is not past due. And most non-credit agencies (i.e. those without a regular payment schedule) never report past due in the first place (only unpaid).
I am suggesting that in the new system, a credit ding would come along with the debt reduction.
In fact, elsewhere on this thread, I suggested that perhaps the size of the ding would be proportional to the size of the debt reduction. This gives the debtor more incentive to pay as much as possible.
Maybe I'm phrasing what you meant with your third sentence, but one reason the banks would have losses is that 2ct per dollar is only the average and those that could actually pay those 2ct are worth more then those 2ct.
Simple example: 100 people overall, each having a 100000 dollar debt; 20 of them will not be able to pay back anything, 20 are able to pay back 1 ct per dollar, 20 are able to pay back 2 ct per dollar, 40 are able to pay back 3.5 ct per dollar. Those 40 on top will now, too, only pay back 2 ct per dollar and the bank loses 1.5 ct per dollar on them, resulting in 100000 * 40 * 1.5ct = 60000 dollar losses.
Personally I'd like that solution anyway, because it would help to even out the unfair distribution of wealth.
Well, think about it from the lender's position. They can settle with you for $1,000, or they can sell the debt to a collector for $1,500. Which would you do?
You didn't understand the scenario. If they're going to sell to the collector for $1500 the why shouldn't the borrower have the chance to pay the same $1500 first?
The situations are not the same - the mere existance of such right of first refusal changes the value of this loan.
The price is mostly determined by information asymmetry - you don't know which debtors will be 'dry' and which will pay, but you can buy/sell a bundle of them and assume some average rate. If the sale was burdened with the right of first refusal (on a loan-per-loan basis) to a debtor who has much better knowledge on how much he can pay, then the deal is broken - collectors would be stuck with all the value-below-price loans while the value-above-price loans would get away for the listed price.
Also, it changes the value of your loan pre-sale - if my policies, in effect, tell you "well, you'll have a chance to get away with paying x% of the loan" then you won't pay more than x%, ever. If my policies tell you "I'll sell your loan for x%, but in that case you'll get screwed and pay 2*x% to the collector", then I have a reasonable chance to get more money than x% out of you before the sale.
It's quite likely that a policy "pay $1500 or I'll sell your loan to someone for $1000 who'll harass you until you pay much more than $1500" is rational and economically effective even though theoretically you're leaving $500 on the table; since it affects your decisions on when/if/how much to pay.
I think you have to factor in the threat of a credit ding. If the debtor knew that reductions would result in a lower credit score (and perhaps the degree of the credit penalty would be a function of the debt reduction percentage), then you can bring some parity back into the scenario.
I am also not sure how debt is currently priced. But, it would seem that current credit score and other metrics might go into the pricing, such that there is more of an actuarial approach. In this case, the price wouldn't be driven as much by information assymetry.
So, combine a lender who is more informed about how much debtors can pay with debtors who have incentive to pay as much as possible to protect their credit, then add the fact that you're throwing out the middlemen (debt collectors). It might be a win-win for the creditor/debtor, with only the debt buyers losing.
No, "credit ding" is not a factor here - we're discussing situations where you're already defaulting and it should be already marked on your credit. No matter if you're paying x% of the loan to the original lender or y% of the loan to the loan collector - you're still someone who can't/won't repay a loan (not just some tardiness in payments, but a default) and thus shouldn't get any loans in future.
If you're still just delaying and are willing to pay near-100% of the principal - then you might get some deal where "protect your credit" is a factor, but these aren't the sort of pennies-on-dollar deals the original article talks about.
> So in theory, if you can pay $1,000 to buy your own debt, somebody else should be willing to bid at least $1,001.
Not at all true. Suppose I have, for instance, a debt dischargeable in bankruptcy, which has a current balance of $10,000, and $1,000 in assets. I might be able to pay $1,000 to purchase and settle the debt, but I'd have very little reason to pay $1,000 on the debt without it being a full settlement, and there's pretty much no reason for any third party to be willing to pay $1,001 (or any value not substantially less than $1,000) to purchase the debt.
That's why I qualify all of this with a legal system that is able to seize the assets of debtors when needed. In that case, it doesn't matter whether you want to pay $1,000 or not, you will be made to.
> That's why I qualify all of this with a legal system that is able to seize the assets of debtors when needed. In that case, it doesn't matter whether you want to pay $1,000 or not, you will be made to.
Sure, if you have a legal system that has zero cost, zero risk of not getting the outcome you expect, takes zero time to operate, doesn't include bankruptcy or other avenues of discharging debt, and debtors never have multiple competing claims on their assets that are not part of the same package being sold... if all that is true, then the amount a third-party purchaser should be willing to pay for debt should generally be the lesser of the face value or the total of the debtor's assets.
However, those assumptions bear basically no resemblance to any set of conditions that applies in the real world, so its all meaningless.
Keep in mind that if I can settle a debt for $1000 I may very well be able to lend money from friends or family to do so, whereas I'd likely be unwilling to do that if I would face certain bankruptcy regardless.
There are many situations where a person may not have any seizable assets, but still have the ability to raise cash to cover a firm offer to settle a debt.
Well, you maybe willing to pay $1000 to settle the debt when the nice lady from the bank called you, but chances are you will be willing to pay more if a debt collector shows up at your door.
But then there's the difference between capacity to pay and willingness to pay.
If I had this huge debt, I might be willing to borrow a little from friends to get rid of it, so I might only have $800 (+$200 from friend). The creditor realises I can pay $1000, so tries to sell it for $1500. Suddenly I'm stuck again.
Also, it could turn out that I could pay $1000, but I won't. There's also a collection cost (hire a guy at minimum wage to stand outside the guy's house for a day costs something).So the $1000 might end up not being worth anything at all.
It is implied that the purchaser would be a third-party with the ultimate intention of waiving whatever debts that a traditional debt collector would pursue.
It is better for yourself and the creditor to just bypass the horrible and at times abusive debt collectors, but this would create a perverse incentive to ALWAYS default on loans.
Creditors asses your potential for default and base the rate of lending on that risk. In your scenario the rate of default would always be high therefore the rate that you borrow at would be extremely high, think loan shark high. Or you would find that no one is willing to lend money and this would cripple an important part of the financial system. Think student loans never existing.
"but this would create a perverse incentive to ALWAYS default on loans."
Statically, yes. However I'm having a harder time mentally analyzing what this would do dynamically, which is a much more interesting problem, since the real world is not static.
My first approximation is that because "everyone" would know this is something they can do with their debt, that lending would consequently become much more rare, and lenders would be much more careful about securing their loans. The initial impact on the economy would probably be sharply negative; what happens after that is probably a "your guess is as good as mine" situation, even amongst economists. Attitudes about debt have varied widely throughout time and space. Some will say tightened lending will wreck the economy longterm, others would suggest that loose lending has already wrecked the economy and the initial shock would simply be paying down damage already done, after which the economy would be much healthier. Which side you fall down on probably has more to do with ideology than education; given how much trouble economists have explaining even our current economy I'm not willing to give even experts much credence for explaining how such a different one would work.
You're right on that dynamically it is a very interesting problem and something that from my exposure to economics, economists seem to spend very little time analyzing.
Changes beget other changes and so on. Finding the steady state level of change would be challenging yet interesting to model.
I have a PhD in economics and that is the first thing that an economist would think of (in my case it wasn't, but I did eventually realize it...).
One reason why many of the the "crazy" ideas posted on HN don't make it to policy, is that there are people trained in economics who are able to see the flaws in such policies.
EDIT: and in case you were curious, this wouldn't generally be considered a dynamic problem in economics. Once the policy was announced, interest rates would immediately change to a new equilibrium, which accounted for people's higher tendency to default. So the problem is simply to calculate the new static equilibrium.
Yes, in this case I merely mean to bring in the idea that changes are reacted to. I was using static vs. dynamic more in the physics sense, where "static" can be looked at as a snapshot of the system you're looking at, whereas dynamic brings in the concept of time. I agree that all else being equal, there's every reason to believe that this sort of change would produce a new static equilibrium, at least in terms of debt itself. (My doubt is more about the net effect on the economy as a whole, as debt seems to be a matter of some debate even today. The dominant economic thought seems to be pretty comfortable with it, I have to admit I'm coming around to more of a "Black Swan" sort view where I think the dominant consensus is overvaluing it, which interestingly also accords with a lot of historical thinking on the topic albeit not with that amount of mathematical backing.)
We usually call the immediate effect (in this case on interest rates) partial equilibrium, and the "full" effect including all flow on effects, "general equilibrium". And there are models which include dynamic and random effects (dynamic stochastic general equilibrium - DSGE - models). Can't tell you much about them apart from the name :-)
Anyway it seems like messing with debt contracts is a bad way to change the interest rate, if that's all you want to do, since that is precisely the lever that the Federal Reserve controls anyway.
>> It is better for yourself and the creditor to just bypass the horrible and at times abusive debt collectors, but this would create a perverse incentive to ALWAYS default on loans.
Doesn't valuing your credit counteract that incentive? You'd only get one shot at this before you lose it. Also, this has long been an option with credit cards.
>Doesn't valuing your credit counteract that incentive?
So what? All poor credit means is that it will be more expensive for me to borrow in the future. If I know I can buy back my debt for pennies on the dollar, who cares how expensive it is for me to borrow?
What this would do is make credit an essentially all or nothing proposition. One screw up and any future car loan, student loan, mortgage or other debt I want is out. I would rather have the opportunity to make up for my mistake by borrowing more expensivly than never being allowed to borrow again.
That is how it works currently. For example, say I have good credit, and it is very easy for me to borrow. My brother has ok credit, and has to borrow more expensively. My parents have terrible credit, and they cannot borrow at all (right now, at some point, their poor credit will fall of their history).
Except defaulting on the loan still has a significant hit on your credit rating, and maybe buying your debt is another negative score on your credit rating.
> this would cripple an important part of the financial system. Think student loans never existing.
I'd see loans more as band aid for broken social structure: "People would not be able to pay for their important medical bills in case of crises." - If the US had a proper medical care system nobody would have to pay for important treatment personally, "Without student loans only the rich would be able to go to university" - If good education was free (at least until your first master degree) even more people from poor families would dare to get advanced degrees, and so on.
There are a lot of countries in which a debt free life is the norm and not the exception. The only parts of society where loans are necessary seems to be for startups and generally for corporate investments.
I see responsible debt with personal loans also playing important parts as loans to startups and corporate investments. It serves a function of distributing capital where it can be used most effectively at a smaller scale.
A creditor needs only say 5% a year return and will be willing to lend. I may need money now to buy a new computer or repair my car which has value greater to me than the 5% my creditor values if my car/computer allows me to work effectively or even work in the first place.
Countries without broken social structure such as Sweden and Norway also high debt to income ratios. Debt is not about having to pay for things that we think the state should pay, its strictly about our consumption patterns. And some of us debt finance high value items such as education and some of us debt finance lifestyle increases. http://www.norges-bank.no/pages/93708/Staff_memo_2013_05_eng...
i dont think lifestyle increases (i assume you mean improvements) should not be financed by debt. It should be financed by profit. I can understand financing education by debt - its an investment, which hopefully, should make a return afterwards in the form of higher productivity/output/value when doing a job.
Life style improvements - such as getting a better car, or going on holidays, or bigger tv etc, do are not improvements to your cashflow, and should never be financed by debt.
No, because people are not money earning machines. People earn money to satisfy their needs, and the ability of earning money doesn't always sync with their needs timely. A loan will help that. So you can take your children to Disney world when they are 8, instead of saving till they are 18 to make the first trip to Orlando.
or, you don't take your kids to disney world, but teach them, bright and early when they are young, that the family is poor. That they need to understand what circumstance they are in, and don't throw tantrums or compare themselves to their neighbours who _do_ have the money to go. Tell them they need to study hard, and make sure they get a good education from school, so that their future is better than the parent's.
Then, when they are 18, they'd have a much more mature mentality, and won't go out to get drunk and cause problems for themselves. They'd be able to get a job, or try start their own business, etc. When time comes for them to have their own kids, they'd have enough to take their kids to disneyland.
It seems that now we have the opposite, an incentive for people to go directly to debt collectors. I had a radiology office in Charlotte give me a needless CT scan and bill me directly (instead of my insurance), so I owed them hundreds, and they went to collections after I paid part of it in a month, and never let me view the balance online.
The problem is that people just go to collections without trying to collect the debt.
It would be better for the borrower, but since it would create an incentive to default on loans [slightly more], it is not better for the creditor - so creditors simply don't do it because of that.
They can and do make direct discounted offers to the debtor; but these are completely different offers than sales to debt collectors; it is not in their interest to match the offers.
Not quite for everyone - if you already had a first degree you had to pay your own fees if you did a second first degree. My wife did a law degree as a second first degree and we had to pay her fees - what was interesting was that the fees varied a lot from university to university. What was really odd was that the best universities were also the cheapest (by a factor of about 10 - from about £400 to £4000 a year).
Also, if you are Scottish and attending a Scottish university tuition fees are still paid by the taxpayer as they did in the old days. (NB I am a Scot and I've never understood how this can be justified).
What I mean is that I find it difficult to justify that kids in Scotland get their fees paid and those in England (and probably elsewhere in the UK) do not.
Huge moral hazard. Limiting moral hazard is what keeps our insurance/finance/debt system churning.
That said, lobbyists pay politicians and the media to help them believe that the people who are in a position to benefit most from moral hazard are also immune to it - something which has shown to be not the case.
This already exists, its called debt negotiation and they advertise the crap out of it.
Basically they take someone with a ton of debt who already has destroyed credit, and have them pay into a trust every month instead of paying their credit card bills. Every so often the company calls up a card issuer and tries to negotiate along the lines of "I have these N people with $10,000 in debt each, will you take $1,000 cash from each of them today?"
The super sneaky part is that after they have settled all your debt, your credit is totally hosed. However you've made good on 36 or so monthly payments to them, so they know you can continue to pay them and you are now free of other debts, and will issue you credit based on this insider knowledge (which you accept because they are the only ones willing to extend you credit at this point).
When loans are forgiven by borrowers, the difference is treated as taxable income by the IRS (in the US). This would complicate your scenario somewhat, but the debtor would still be better off paying the taxes on the $19K than the entire original debt.
Kind of, and kind of not. A lot of people have gone from having some amount of debt owed to a company (bank or not) to having some amount of debt owed in tax (government).
What that means is that they sat there with $20K in unpaid credit card bills, they got hassled by collection agencies, now the money they didn't have is unpaid taxes, which means the IRS will hunt them down, garnish their wages, take their property, and if necessary put them in jail.
The correct thing to do from a disruptive/#occupy perspective is to buy the debt and then give the debtor new terms. They could make the terms require repayment, and forgiven on death. Then it is still a 'debt' (so so tax hit) but you don't have to pay it back (so no worry and debt collectors hounding you), If you die the IRS can try to get their pound of flesh out of your presumably destitute estate.
A better option would be to buy the debt and do nothing with it ever. Just hold it until the person chooses to "redeem" it. i.e. pay the face value of the debt and can afford the taxes on it.
Just send them a message like:
"Hey we're a non-profit founded by Occupy Wallstreeters that bought your debt dirt cheap for X dollars directly from the last debt collection agency to hold your debt. You don't need to do anything now, we'll hold onto it forever if need be. However, if it turns out you need to "check back into the credit economy", we'll sell it to you at cost. Be aware, that doing so will create "income" for you in the eyes of the IRS, so only choose to buy this back if you can also afford to pay them as well in the same fiscal year. You can visit this link and put in your current income to calculate approximately how much you would owe the IRS if we were to opt for us to forgive this debt. Again, you don't have to do anything and we're never going to call you and pester at work like credit collections do."
It also explains why getting a loan is not considered income, because it will be paid back. The interest you pay is income for the entity issuing the loan.
If that entity now "forgives" the debt, it now becomes income for the borrower. They could presumably file a "loss" for the interest they will now not be getting.
Did I get that right?
This would also mean this kind of open a possibility of tax fraud. Companies issuing "loans" to employees, instead of paying salaries. I am sure IRS has something against that as well.
Pretty much. If you went to the bank and they gave you $10,000 and you never had to repay it, then it is income.
I experienced it when I got some restricted stock (not an option but you can't sell it right way) when my company was acquired in the dot.com boom. I also got a "loan" to pay the taxes. The idea was that when the stock was available to sell, you could sell enough to pay tax on the loan forgiveness and keep the rest. (yes it was kind of convoluted but such were the times). Long story short, stock that was worth $35 in 1999 was worth $0.66 in 2001. Kinda bites big time. And yes you can take the loss, but only up to $3,000 and carry the rest forward to the next year. I believe that last year was the first year I didn't have any dot.com losses I could claim any more on my taxes :-).
Willy Nelson - threatened ( I think he got probation )
Generally the pattern is very similar, taxes don't get paid, there is some reasoning on the part of the taxpayer why they didn't pay their tax, they are charged with evasion and work from there. This is because typically people who owe taxes they don't have the money to pay, don't file a tax return, which is the minimum definition of "evasion" according to my CPA friends. I am much less familiar with people who file a tax return, indicate they owe more than has been withheld, and then just let it go at that. I don't doubt they are out there but I just haven't seen the details of any cases like that (would be interested though if they are out there, searching the web hasn't turned up much, the IRS suggests you talk to them [1], they don't go into 'you talked to us and still won't pay')
All examples of people who claimed to owe less than they did. You need to provide an example of "I owe $10000; I don't have it" going to prison. Re: [1], at some point they start freezing assets and collecting the owed amount on their own, but you remain free to walk the streets.
I'm looking for that exemplar (someone who filed a tax return saying they owed more than they paid, and didn't pay anyway). The common cases seem to be, as you point out as well, either a tax return that justifies not paying the tax via some sort of reasoning, or simply not filing.
Random idea: If a creditor is about to sell your debt to a debt collector for pennies on the dollar, what if they were forced, by law, to give you right of first refusal?
While others are correct to point out that such a law would create perverse incentives, it's worth noting that debtors can already effectively buy their debt for a fraction of the price though settlements.
> While others are correct to point out that such a law would create perverse incentives
I'm not seeing it, and nor would anyone else who relies on good credit to, e.g. buy a car anywhere other than one of those weekly payment or your car won't start places.
I'm not seeing it, and nor would anyone else who relies on good credit ...
So, anyone who disagrees with you fails to see the value of good credit?
The problem with your argument is that we're talking about people who've already harmed their own credit, probably for reasons out of their control. It turns out that people screw up their credit for all sorts of reasons, even though they presumably understand that it's harmful.
That reasoning is circular: If they are already in default, the debt is being sold at a discount, so if the debtor buys it at market value, there is no perverse incentive, and the debt holder gets market value.
Incentive is only perverse if it would induce an otherwise non-defaulting debtor to default to get his debt to be sold at a discount.
If you had the right of first refusal to buy your own debt for pennies on the dollar, what would be the point of paying back any debt at all, ever?
But then let's say you could big on for the right to collect your own debt along with the other debt collectors. That would just bring the price up to whatever you're willing to pay plus a premium, or the whole debt in itself.
Since you could pay $1,000 for a $20,000 debt, the collector could offer $1,500 to collect that debt, knowing they could already get $1,000 from you towards it. That would continue until either you have shown that you could pay back the debt yourself, or you'd be outbid by one pissed off collector that would make your life more hellish.
Anyone can declare bankruptcy and have their debts wiped away. What is the point of paying back any debt at all? Why not just run up as much debt as you possible can and then just declare bankruptcy?
Because I imagine declaring bankruptcy would involve a lot more paperwork and hassle then just buying your debt at pennies to the dollar?
So paperwork is the reason no to go bankrupt?
That and in bankruptcy all your remaining assets would be distributed to pay your creditors.
If you have remaining assets then presumably some other creditor will offer more money to take on the debt. The only difference now is that you get first refusal.
Well I would assume going bankrupt would ruin your credit rating far more than just purchasing your debt at pennies to the dollar. The paperwork is an extra hassle that wouldn't apply in the case where you buy a contract from your lender.
Even if you could buy your debt from your lender via the first right of refusal that might bring up fraud charges against you, since you fraudulently deprived the lender of money rightfully owing.
You can go ahead and try to negotiate in most countries, and you will find most creditors are willing to, as long as you provide sufficient documentation that you are unable to meet the original obligations, and your offer is reasonable with respect to what you can actually pay.
In many countries (UK for example), there are a long range of legal protections that can be used in such situations too.
In the UK, generally you'd write to each creditor and inform them of your situation, and ask that they freeze interests, and then either offer a reduced lump sump, or more commonly offer all your creditors a weekly or monthly amount that you are actually able to pay.
If creditors refuse this, there are options such as what is called an "individual voluntary arrangement" where you can arrange to settle with the creditors as a group, and where a 75% approval of the creditors binds your remaining creditors with support of the Insolvency Act, and so there's little benefit for creditors to be unreasonable.
The key thing to addressing debt is generally to address it as early as possible - the earlier you are honest with a creditor about payment difficulties, the more amenable they tend to be about flexible arrangements.
So it's not such a crazy notion - the main thing it would achieve would be to give you visibility into what is happening to your debt before it happens.
There is of course the risk that it would create an incentive for some people to try to trigger a situation where the debt is offered for sale.
Can't tell if serious...in all reality though, why not? It's not like I get a big break by defaulting on my loans (or rather, being sold to a different collection agency). If Company A is going to sell $10,000 of debt to Company B for $1000, and I'm going to have my credit dragged through the mud, make my life miserable and still owe $10,000 that I might be able to settle down to $5000, why not just pay Company A $1000, have my credit dragged through the mud, and get on with my life? Company A doesn't lose anything they haven't already lost, my situation is greatly improved, and I don't think anyone is crying for the piranha Company Bs out there. And it's not like my credit going to crap is a win-win scenario.
I'd assume this maneuver would trash the debtor's credit, reducing their future access to credit - thus, limited moral hazard. The presumption, more likely, is that any price a debt collector is willing to pay for a debt is more than what a penniless debtor is able to. $20k of debt wouldn't sell for $1k unless the debtor were making so little that $1k would be a substantial amount of their time (else the cc company wouldn't sell for $1k).
CC companies have no idea what you can or cannot pay, nor do they care. What they care about is that you haven't made a payment in a while, despite letters and phone calls urging you to pay. After a fairly short time they want (and perhaps must) clear the debt off their books, so they sell it to a collection agency. They appear (based on the article) to sell at a fixed 5% rate rather than auctioning the debt to the highest bidder.
So, if the debtor can afford 5% but no more, the CC company achieves their goal of clearing the bad debt for the same price they would by selling to an agency.
Why not hold out for more? The debtor has already shown an unwillingness to pay under the current terms, and time has run out for holding the bad debt.
Why would the debtor be willing/able to pay 5% but not the current terms? For a CC, it's probably the interest rate and interest balance. In this situation the CC company is usually charging 19% - 25% interest and including accumulated unpaid interest in the balance. If the debtor makes a payment, the terms say that the payment is applied to interest first, so the debtor's principal is not reduced at all until ALL of the interest is paid. That can be lifetime indenture to the CC company. A 5% payoff is a renegotiation of the terms which will terminate the account and prevent any further interest charges. That's worth scraping together the money needed for the payoff.
What if I told you that medical/accident/disaster expenses (even just counting deductables and co-pays when insured), are not "borrowed to live a comfortable life" but are treated by the credit system the same as unbridled credit spending?
Even the better - someone who has decided that he really doesn't need to ever borrow money has no worries about any credit ratings, so borrowing $20 000, 'defaulting' and paying $10 000 to cover the loan would be completely free legal money with no practical consequences.
A bank would be likely unwilling to engage in such a practice, because by doing so they would gain a reputation for being "soft". In particular, anyone who borrows from the bank knows that they can "default" on the loan and pay much less than they originally borrowed.
Your sympathy for people who owe money is misplaced. We already have tax and welfare that transfers money from the rich to the poor. Conditional on a given income, owing money to a bank is a poor measure of your true wealth. Furthermore, it sets up perverse incentives compared to the current taxation system. That is it encourages people to consume now and go into debt, since they know that debt will be (partially) forgiven.
EDIT: The last sentence is wrong: once this proposed measure is introduced, interest rates will adjust. People who choose to (cheaply) default we be subsidized at the expense of people who do not. However, the poster imagined that people who owe money would benefit, and so my point still applies to the impact they imagined this measure would have.
>Your sympathy for people who owe money is misplaced. We already have tax and welfare that transfers money from the rich to the poor.
Your sympathies for the banks and the rich are misplaced. We already have corporate welfare and a financial system that guarantees outsized profits combined with no-matter-what CEO compensation on the upside, and stop-losses insured by taxpayers on the downside.
I don't care about the banks, that is a separate issue. There is a competitive market for loans. Making it effectively cheaper to default on a loan will subsidize people who default, at the expense of people who do not.
I am saying that we should not be transferring money from people who choose to default over those who do not. We should be transferring money from people who are wealthy to people who are not. Which is what taxation and welfare does.
Try to focus on what I am saying rather than the bad guys that you falsely assume I represent.
>Try to focus on what I am saying rather than the bad guys that you falsely assume I represent.
My apologies. I did mis-read the link that you were drawing between people who owe money and the poor; or rather, that your very point was that there is not necessarily a link.
I don't agree with your conclusion, however, as there is a large and growing swath of people who may not be "poor" enough to receive welfare per se, but who struggle financially and are in over their heads. That may well be largely who we are talking about here. So, my confusion came in because I hadn't linked what you were de-linking in the first place. That is, I don't see this as a scheme to bring equity to poor people who are already served by welfare and other transfers under the tax code.
So, let me rephrase. Why is it that we use value-judgment loaded phrases like "misplaced sympathy" to describe people who owe money? And, why do we emphasize fears of market distortion and moral hazard produced by debt-forgiveness so much more than for bailouts, corporate welfare, outsized CEO pay, etc.?
I have nothing against taking a person's debt into account when deciding on matters of welfare. Bankruptcy is one option, but maybe the government should sometimes help people who would otherwise face bankruptcy.
My problem is with equating debt, as opposed to poverty in general, with being owed support by others. Hence the "misplaced sympathy". We do need to encourage responsibility while at the same time looking after people no matter what situation they find themselves in.
On your final point, there is no "we". On bailouts, there was no other option (from the point of view of the people making the decision). I already pointed to tax and welfare as another option for helping poor people. On corporate welfare and CEO pay these are not really anything to do with moral hazard so I don't know what your point was.
>My problem is with equating debt, as opposed to poverty in general, with being owed support others.
Again, "owed support" seems to carry some sort of moral judgment. What does it mean? Perhaps you can qualify that. I mean, are you trying to say that poor people are "owed support" because poverty is more systemic and cyclical, while debt is viewed as more of a choice? Because, I would argue that the latter is not nearly as clean as that.
But, kudos that you seem to realize this to some extent and are now allowing (or clarifying) that perhaps some indebted people are deserving of help vs. lumping them all into the "unworthy of sympathy" bucket.
>On corporate welfare and CEO pay these are not really anything to do with moral hazard so I don't know what your point was.
That's why I wrote "market distortion and moral hazard". These would be examples of the former. Outsized CEO pay does not exactly suggest a meritocracy in our labor market (especially when the CEO has driven his company over a cliff). Likewise, corporate welfare isn't exactly free-market activity.
The overarching point is that we seem to be hell-bent on accountability, personal responsibility, protecting the markets, etc. when it comes to individuals to the point where it rises to the level of morality judgments. But, we allow corporate welfare, bailouts, outlandish CEO pay etc. with barely a peep.
For instance, people are taught that walking away from a mortgage on a home whose value has plummeted is dishonest and basically evil. But, deliberately creating and selling bad debt and leveraging it ad infinitum to enormous profits not only slides by with merely a few grumbles, but the perpetrators are handsomely rewarded and are the very people to whom the debtors are supposedly morally accountable. It's a crazy double-standard.
So, when someone comes along and proposes to help individuals as the OP did, we start pontificating about the perils of distorting the market (which is already grossly distorted), and we try to carefully parse out who is "deserving", etc.
It's ridiculous, really. And I am suggesting that when people toe this party line, they are supporting this inequity, even when it is not their intent.
In many ways the creditor does do that (and even the debt collector). Send them a letter that you are willing to pay them the 1k up front, and they will actually be pretty willing to accept it.
It could be argued that perhaps it is not such a good idea to base money on debt. But it has managed to get the job done, largely because people can still be expected to pay debts in full. This expectation largely holds because the system is set up so that paying in full is by far the most attractive option.
The thing about your system is that under it, paying debts in full doesn't make any sense. You could just hold out for a settlement, pay far less than what you'd borrowed at that time, and leave the creditor holding the bag for the rest. When paying in full doesn't make any sense, lending doesn't make any sense either. When lending doesn't make any sense, then a system of money based on debt is doomed to collapse.
One possible way to mitigate this is to set it up so that the debtor earns the legal right to first refusal when, over the lifetime of the debt to date, an amount of money equal to the original principal (or maybe the principal plus some multiple of the APR) has been paid into it. That would prevent the worst abuses of first refusal, because you don't get it until the lender has at least recouped its initial investment. But it doesn't completely solve the problem.
But then banks would have less incentive to give out loans. You wouldn't have to pay back loans, just wait until you can purchase your debt for a fraction of the cost. Banks could then counter this by holding on to all debt, but this means giving out loans would be an even greater risk to them. This isn't necessarily a bad thing, though.
Yes as there woudl be a perverse incentives to default -
The issue of moral hazard comes into play.
It woudl lead to increased costs for everyone applying for credit the lender woudl have to make more on good debtors to make it worth while to lend to anyone.
If this was a law, everyone would run up a bunch of debt and settle it for pennies on the dollar (nearly free money). How could a credit system survive if there is little consequence for being a dead beat?
Why don't I just borrow a million dollars, buy gold with it and bury most of it in a field. When they come for it, I'll just give them $1000 and then go dig up the gold and retire.
I believe this is how bankruptcy works in Australia, and to take your last sentence as a metaphor, is exactly what happens (assuming the stigma of bankrupty isn't a big enough deterrent for you).
Debt collection agencies hounding you for years. Re-possessing assets if possible, garnishing wages, placing levy's on your property ETC.
Of course if you file bankruptcy, this all changes.
IMO people should have to pay back money they have borrowed no matter how long it takes. I have known too many people who rack up a bunch of debt with the "I want it now and I will pay for it later" attitude. It is easy to have this attitude when these people can just declare bankruptcy if they get in too deep (as many people I have known have done). With no strong deterrent, of course people are going to be lackadaisical about this.
I've known people who have piled up debts that they cannot pay. Being hounded by debt collectors (and avoiding them) just becomes a way of life. Re-possessing assets? I am assuming you mean the asset that was purchased with the credit that resulted in the debt. This wouldn't have to change under the proposed system. There would still be secured loans.
Garnishment and levies? In practice these are pretty rare and costly for the kinds of debt here. You see this more for taxes and child support, not unsecured consumer debt.
Instead, credit dings (chargeoffs, etc.) are the most common result, and that wouldn't have to change under the proposed system. So, there's your deterrent. Those "deadbeats" you mentioned would then not be able to obtain credit. In fact, credit requirements may become more stringent if lenders really perceive risk from "deadbeats" under the new system.
>...the "I want it now and I will pay for it later" attitude.
If anyone needs deterrent, it's the reckless lenders. Marketing works and for years, the mesage from creditors and retail outlets has been "you can have it now and pay later". In fact, some "retail" outfits were nothing but credit providers using (often cheap) products as a vehicle to sell credit. Think Rooms To Go.
And some people are just not as sophisticated as others. So, when selling easy credit in abundance, you are more likely to attract and empower those who are least able to afford it. OTOH, we have an entire industry set up to determine creditworthiness and businesses that sell credit are far more sophisticated than the average consumer, yet somehow it's the consumer who gets in over his head who is the morally bankrupt deadbeat. The creditor is merely a victim, though they still manage to make a profit. And, oh yeah, if the largest of these do get into trouble, because the outsized risk they took for outsized profits finally backfired, then we bail them out and restore their saintly CEOs' compensation to its rightful place in the stratosphere.
On balance, the current system smells an awful lot like a racket.
So, you wanna get rid of limited liability for corporations too?
Because the arguments against limited liability for individuals in the form of bankruptcy laws seem to be pretty compelling arguments against corporate limited liability through incorporation.
Except, of course, that corporations are saintly entrepreneurial wealth creators while individuals are irresponsible scum.
No matter how long it takes? Or until the debtor is dead? Death is an arbitrary line, so why not make bankruptcy the arbitrary line instead? Or maybe the late debtor's family should be liable. What if they just can't pay? Do they have to come and work for you?
The point I'm making is that there have to be limits to a debtor's liability. The question is where the limits are. You can't just say all debts must be repaid.
I think you're both over-estimating AND under-estimating the rationality of people's behaviour. It is important that going bankrupt is somewhat unpleasant. If it wasn't, then normal people, who are somewhat rational, would have no incentive to pay back debt, and defaulting on loans would become normal. However, some people are always going to fail to think ahead and try to borrow irresponsibly. Even if bankrupt people were put in the workhouse and given punishing physical labour, those kinds of people would still be financially irresponsible. That's why the poorhouses were never empty, despite them being horrible places by design. Saddling people with debt forever won't stop irresponsible borrowing. Being broke is already horrible and punishing people harder is unlikely to make them think more rationally.
I'm guessing you're probably a smart person who thinks ahead and makes smart choices - you have to understand that not everyone in the world is like that. Punishing people who are not like that is unlikely to change them. You can't punch someone in the face to make them smart. You can punch someone in the face to make them obey you, but in this context that would mean singling out all irresponsible people and then punishing them before they take out a loan, not after. If you were able to identify irresponsible people then you might as well just not lend them any money.
Which brings me to the real benefit of bankruptcy. That is, if you really want to stop irresponsible borrowing, then it makes a lot of sense to also discourage irresponsible lending. Banks and credit unions are far more rational than the general population. If individuals are allowed to go bankrupt, there is a clear incentive not to lend money to people who don't have the means to pay off the debt. By providing that incentive, it then becomes the problem of the lender to identify whether or not an individual is likely to be able to pay of a loan. The lender is has a lot of information and resources through which they can make such a determination.
Now, different people have different ideas about the morality of this situation. Some would say that it's wrong for banks to take advantage of the irrational people, so it makes sense to provide incentives for responsible lending. Others would say that if individuals are irrational, then they get what they deserve, and banks should only be required to behave rationally. Personally, I don't think stupidity is morally wrong (otherwise dogs would be pure evil), and it's often quite self serving to argue otherwise.
What's crazy is that if you form a company and borrow a million USD, no one is surprised if you go bankrupt and not pay anything back -- and you get to keep your personal assets (excepting what was invested in the company) -- while if you borrow 10.000, with interest, you might lose your home.
For example: I owe a credit card company $20k, but I have defaulted on the loan. The credit card company is about to sell this debt to a collector for $1k, who will proceed to make my life miserable. If there were such a law, the credit card company would first have to offer the debt to me for $1k. In this scenario, I could indeed buy my own debt and we all could go on our merry way (except the debt collector).
Crazy?