5 ms·

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

by 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.
- unclebucknasty 13y ago
  >If they do it too often people will deliberately not pay their bills Perhaps not, if it resulted in a credit ding.
  - ars 13y ago
    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).
    - unclebucknasty 13y ago
      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.
- deleted 13y ago
  [deleted]
sliverstorm 13y ago
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?
- gnaritas 13y ago
  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?
  - PeterisP 13y ago
    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.
    - unclebucknasty 13y ago
      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.
Perseids 13y ago
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.
timv 13y ago
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.
- unclebucknasty 13y ago
  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!
  - andrewfong 13y ago
    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.

by alan_cx 13y ago

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.

unclebucknasty 13y ago
>If they do it too often people will deliberately not pay their bills Perhaps not, if it resulted in a credit ding.
- ars 13y ago
  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).
  - unclebucknasty 13y ago
    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.
deleted 13y ago
[deleted]

sliverstorm 13y ago

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?

gnaritas 13y ago
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?
- PeterisP 13y ago
  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.
  - unclebucknasty 13y ago
    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.

Perseids 13y ago

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.

timv 13y ago

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.

unclebucknasty 13y ago
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!
- andrewfong 13y ago
  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.