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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 fir

• chadillac83 13y ago
  I love this idea, I can't wait to default on all of my loans!
  • JumpCrisscross 13y ago
    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).
    • bcoates 13y ago
      It'll trash your credit no matter who it's sold to; at least buying it yourself would relieve you of the debt.
    • DougWebb 13y ago
      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.
  • davvolun 13y ago
    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.
  • rodgerd 13y ago
    Well, perhaps lenders would be a little more careful about who they give money to.
  • fleitz 13y ago
    What if I told you that you don't need to borrow money to live a comfortable life?
    • DougWebb 13y ago
      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?
      • fleitz 13y ago
        I'd tell you that you live in country on par with North Korea in terms of respect for humanity.
    • PeterisP 13y ago
      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.
• debacle 13y ago
  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.
  • rayiner 13y ago
    > Limiting moral hazard is what keeps our insurance/finance/debt system churning Citation needed.
  • pacofvf 13y ago
    As others have pointed out, the moral hazard is limited because you would never be able to get a loan again. > Limiting moral hazard is what keeps our insurance/finance/debt system churnin I kind of agree with that but I think you meant 'Trust' instead of 'Limiting moral hazard' in that sentence.
    • deleted 13y ago
      [deleted]
• Miner49er 13y ago
  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.
• dchmiel 13y ago
  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.
  • the_watcher 13y ago
    >> 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.
    • stinkytaco 13y ago
      >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.
      • rpedroso 13y ago
        Or, alternatively, banks would simply stop offering credit to people with bad credit scores because it would always be a losing proposition for them.
      • the_watcher 13y ago
        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).
• gshubert17 13y ago
  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.
  • nostromo 13y ago
    A gift from me to me! Where's the box for that on my 1040EZ? :) Alternatively, I could agree to pay myself back the full 20k at current interest rates so as to not create a tax singularity.
    • deleted 13y ago
      [deleted]
  • ChuckMcM 13y ago
    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.
    • genericresponse 13y ago
      The IRS cannot and will not put people in jail for unpaid taxes. Please do not spread false information.
      • __underscore__ 13y ago
• mikeash 13y ago
  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.
  • hack_edu 13y ago
    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.
    • kevin_rubyhouse 13y ago
      No, that is not what OP implied at all. "For example, I owe a credit card company $20k"
  • alan_cx 13y ago
    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.
    • ars 13y ago
      > cant offer to settle with the debtor for that amount. They very frequently do. Usually for 1/2 the original amount. If they do it too often people will deliberately not pay their bills in the hopes of getting an offer.
• tekalon 13y ago
  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.
• _pius 13y ago
  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.
  • Zigurd 13y ago
    > 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.
    • _pius 13y ago
      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.
      • Zigurd 13y ago
        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.
• daemin 13y ago
  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.
  • mattm 13y ago
    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?
    • daemin 13y ago
      Because I imagine declaring bankruptcy would involve a lot more paperwork and hassle then just buying your debt at pennies to the dollar? That and in bankruptcy all your remaining assets would be distributed to pay your creditors.
      • nl 13y ago
        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.
        • daemin 13y ago
          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.
• goggles99 13y ago
  Yeah, crazy. 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.
  • rtpg 13y ago
    Except that the following things exist: -Your credit rating could make it impossible for you to get a loan - The bank isn't obligated to give you a million dollar loan - If you buy a house with it, they could repossess the house I don't see why we should consider banks with bad decision making in this.
  • rrrhys 13y ago
    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).
  • unclebucknasty 13y ago
    What's the consequence now for being a deadbeat, and how would this consequence materially change if this were law?
    • goggles99 13y ago
      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.
• yetanotherphd 13y ago
  Yes, it is crazy. 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.
  • unclebucknasty 13y ago
    >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.
    • yetanotherphd 13y ago
      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.
      • 13y ago
• kansface 13y ago
  Why wouldn't debtors always default?
• vidarh 13y ago
  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.
• dsl 13y ago
  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).
• Millennium 13y ago
  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.
• walshemj 13y ago
  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.