Occupy Wall Street activists buy $15m of Americans' personal debt

http://www.theguardian.com/world/2013/nov/12/occupy-wall-street-activists-15m-personal-debt

by sdfjkl • 13 years ago

409 267 13 years ago

theguardian.com

jlgreco2• 13 years ago

There's a joke about bailouts in here somewhere.

MrZongle2• 13 years ago

Unfortunately, the bailout joke is on us.

pchristensen• 13 years ago

Good for them. Markets are working. If the emotional and social value of forgiving debt is worth more than the expected value of collecting on that debt, then capitalism is working! Who could be opposed to this?

pan69• 13 years ago

And how many people get this debt in the first place is true capitalism as well?

bmelton4• 13 years ago

No, that's largely the result of a non-free market resultant from crony capitalism.

dnautics3• 13 years ago

A systemic (political, not free-market) policy of inflation encourages people into debt by decreasing the cost of borrowing (minus the increase in risk-cost, which most people are bad at judging), and by squeezing people by decreasing their cost-of-life margin versus their earning power.

Not to mention politically motives to encourage debt, by incentivising things like mortgages, or creating educational debt systems, etc.

The very dollar itself is an instrument of debt, and it is self-perpetuating -- there has to be a way to pay off the interest on that debt that was the genesis block for that dollar, of course that's done by "printing" money (adding a zero on a digital ledger), which creates inflation, which encourages people into debt, which requires more money to be printed, which requires interest to be paid off on that dollar, which...

benched• 13 years ago

Lately I'm experiencing the Baader-Meinhof Phenomenon with regard to Poe's Law.

davvolun3• 13 years ago

I don't want to get off on a rant here...

eli_gottlieb2• 13 years ago

That's not a cognitive bias happening to you. He's just in Poe's Law territory for real.

Ilmesnkie_Jones• 13 years ago

Its not working because the cost of having those people in debt, which is only worth 400,000, on the open market is probably much much higher.

pradocchia• 13 years ago

The markets probably underprice the value of forgiving debt. For instance, cancelling all mortgage debt under $300K would liquefy the housing market overnight and bring housing prices more in line w/ income, while improving public health and welfare.

The market doesn't price such things in, though. That would be up to the government. How much was spent on the bailouts, and how much would that translate to per mortgage?

tedunangst4• 13 years ago

The reason the market doesn't price such things in is that the guy holding a $300k mortgage is unlikely to personally realize $300k in improved public health by forgiving the debt.

mempko• 13 years ago

food for though, capitalism != markets

tokenizer• 13 years ago

Capitalism is a meaningless word. Does it mean currency based markets? Markets in general? The wage/labour model of business? Corporate Law?

Ultimately we as humans coin many words for real experiences. In my experiences, I exchange my services, in exchange for a representation of value, and in turn purchase my necessities with this representation of value (and in this modern era purchase wants as well).

Personally if you want to stick with idealism, I would coin Capitalism as "... an economic system based on private ownership of the means of production and capital goods, and the production of goods and services for profit in a market economy."

We don't have that 100%. That's for sure. The government has a large part of of modern means of production. And the true public also has co-operatives, syndicates, mafias, gangs, and non-profits.

We definitely have a market economy though. So I definitely agree with your point. I just think Capitalism is nothing more than an ideal.

Because I enjoy this topic so much, my system classifications are as follows: The West: "Inverted Totalitarianism", EU: "Pre Natal Neo-Feudalism", China: "Party Monarchism". As far as I'm concerned, ideologies are great for discussions, but horrible at describing real things.

dnautics3• 13 years ago

well, keep in mind that debt forgiveness is deflationary, so if you are obsessively worried about a great depression caused by a deflationary spiral, these people are causing some serious trouble.

krupan3• 13 years ago

Nice to see people organizing and doing charitable things of their own accord.

wil4213• 13 years ago

Seems like a good idea...

How can I purchase my own debt? Rather than have someone else buy my debt at a reduced rate and abolish it, how about I buy my own?

krupan3• 13 years ago

from the article, "Due to the nature of the debt market, the group is unable to specify whose debt it purchases..."

jlgreco2• 13 years ago

You could "buy" your debt by going to the person that owns it and making them an offer.

twoodfin2• 13 years ago

Debt is priced based on the debtor's expected ability to repay. If you have the means to purchase your own debt, it's probably selling at very close to its face value.

dragonwriter5• 13 years ago

If you have the means to purchase your own debt, it's probably selling at very close to its face value.

If you have the means to purchase your own debt at its face value, its probably selling at very close to its face value.

But the market value of your debt should be approximately (the amount the pricing algorithms expect you to be able to pay) minus (the amount the pricing algorithms expect to be expended in extracting payment from you).

So, IOW, for the average debtor (assuming that the algorithms involved are correct on average), the market price of their debt should be significantly less than they are able to pay.

toomuchtodo3• 13 years ago

I purchased a townhouse for ~$280K at the height of the housing boom. As the recession progressed, my builder went bust, and a new builder came in selling new townhomes for ~$150K.

I stopped paying my mortgage and walked away from the property. 2 years later, I called Bank Of America and negotiated to pay $2K to settle the debt. They accepted and my credit report is as if I never owned the home and walked away.

You can indeed buy your own debt at a steep discount. Its up to you to convince the debtor at how hard it will be to collect.

Disclaimer: I live in a judicial foreclosure state; it costs a substantial amount to perform foreclosures in my state, and also costs the bank to maintain the property between foreclosure and sale. Also, all of my assets were in retirement accounts, effectively judgement-proof.

thatthatis5• 13 years ago

Call your credit card company and offer 50% as paid in full, they'll probably accept 70%.

It'll absolutely kill your credit score, but its an option.

txttran• 13 years ago

Most of the time, when your debt has been sold off to a collection agency, you can negotiate with agency to pay a reduced amount, since it's the easiest outcome for them.

bane3• 13 years ago

Pay it off early. So long as your debt contract doesn't have a huge penalty for early payment, you can save tons of money.

For example, a $500k home loan at 3% over 30 years costs $258,887.26 or more than 50% of the original loan amount!

I've known a couple folks with poor credit scores who bought cars that would cost them almost double the purchase price over 5 years because the interest on their debt was so high.

http://www.bankrate.com/calculators/managing-debt/annual-per...

wil4213• 13 years ago

I guess once your debt gets into a state where its being sold you probably arent making the right payments.

Pay off early! or dont accrue debt.

robrenaud• 13 years ago

3% doesn't seem much higher than the annual rate of inflation.

http://www.inflation.eu/inflation-rates/united-states/histor...

And also probably much less than returns of a balance portfolio of stocks/bonds over a 30 year horizon.

smsm423• 13 years ago

Very easily. If you have a large debt with, say, credit card company, and don't pay it, eventually they may send you an offer saying "pay us so and so and we'll close all (larger) debt account" - or so may do collection company. That's in effect buying your own debt. Before that, though, they'd probably ruin your credit and harass the lights out of you.

ihsw• 13 years ago

I think the parent was more interesting in buying his own debt for 5c on the dollar.

winslow• 13 years ago

However, won't doing this destroy your credit report history and make it a huge pain in the arse to get new credit?

logn• 13 years ago

Before that, though, they'd probably ruin your credit and harass the lights out of you.

They'll also tack on every fee and penalty they can, so that when it does proceed to collections, the amount owed is much more than the prior balance. So if I had the cash to buy my own debt, I'd probably just make minimum payments with that money and look for opportunities to consolidate debt to get the lowest APR.

xefer• 13 years ago

There is a scene in the movie "Queen of Versailles" (at about the 75 minute mark) were David Siegel claims to have indirectly done just that.

He said that he sent a 3rd party into a bank and they sold an 18 million dollar loan he was defaulting on to them for 3.2 million. The bank didn't know about the relationship Siegel had with the 3rd party.

So I get the sense that if you know what you're doing and know the right people you can pull it off.

wil4213• 13 years ago

I guess you couldnt buy your "own" debt but you could get someone to buy it on your behalf.

Zigurd3• 13 years ago

This is what captures the essence of the proposal that debtors should have right of first refusal: If you are in Big Debt, you can hire a lawyer or ibanker as a stalking horse, and there is enough money in the deal to make it worth their while. Right of first refusal just reduces friction to where consumer debtors get access to the same kinds of deals.

You could probably achieve the same result if the creditor has to "mark to market."

e12e4• 13 years ago

Through a shell company?

LukeWalsh4• 13 years ago

After my behavioral economics lecture this morning this is where my mind immediately went: http://ase.tufts.edu/econ/papers/separability.pdf

As much as people would like this to refute capitalism and standard economic models, it really just confirms that the models are incomplete and can be updated with continuing research in to human behavior.

mrow843• 13 years ago

As someone who is being educated in the area, perhaps you can offer me some some answers to a few of questions I have:

1) What are the specific claims of capitalism that actually could be refuted by evidence?

2) Is there any evidence that does seem to refute those claims in any way?

3) Where would we most likely find evidence that the claims were innacurate?

I think the main thing that confuses me is that, from a layman's perspective, we just seem to adapt our picture of what capitalism includes every time something new comes along.

Model refinement is great in principle, but where is the proof that the basic theory is actually correct? There are such a terrifying number of confounding variables...

To use an example from my own field: when ocean models get to a high enough resolution you start seeing a lot of mesoscale eddies. It turns out they are really important in all sorts of processes, and their effects can feed back to larger scales.

For us it's not too bad; running models at sufficient resolution is expensive, but we can use higher-resolution runs to parameterise lower-resolution ones (and better comprehend our ignorance when that doesn't work). My point is that without a pretty good understanding of those fine-scale dynamics you can miss important things in the bigger picture, and I suggest that the economy-society coupled system has many more horrible to understand feedbacks than the ocean-atmosphere system.

Thanks in advance to you, or anyone else who takes the time to answer.

LukeWalsh4• 13 years ago

To start off, the definition of capitalism is simply private ownership of goods, and the ability to trade those goods. A society in which even ONE good was tradable would be considered somewhat capitalistic.

Specifically you could refute the efficiency of a free market reaching an equilibrium price (one that maximizes total surplus for buyers and sellers). However the experimental data suggests precisely the opposite, even in monopoly markets (double auction, perfect information) when tested in laboratory experiments.

Many issues people think they have with capitalism are actually the result of a system that definitely does NOT inherently take in to account all hidden costs. This is often used by government officials to make policy decisions that add costs or incentives to a market to correctly account for all factors (environmental, public good preservation, etc.).

Hope this is helpful!

Symmetry• 13 years ago

They still have to pay income tax on the abolished debt, but for someone in trouble like this that's probably at a pretty low marginal rate. The IRS doesn't want me paying for things by loaning the seller the price and then forgiving the debt as a way of getting around taxes, though that policy ends up being unfair in this situation.

smsm423• 13 years ago

If forgiven debt is counted as income, one can unexpectedly get into a much higher marginal rate bracket than usual. Not sure if IRS allows to amortize it over multiple years or something like that...

encoderer• 13 years ago

That is true. And no, much like income, it's reported in the current year. It's very much just income. No different than if they gave the guy a check to pay his own debt.

nerfhammer• 13 years ago

so can't I take out $36750 in loans, buy the debt for $1000, rinse and repeat?

gdulli• 13 years ago

No, you can't. Can you think of why this wouldn't be possible?

bmelton4• 13 years ago

Except for the fact that your rapidly lessening credit score would make it harder to get the second loan, harder still to get the third, etc. The debt you purchase isn't sold until after substantial collection efforts have been made, and debtors report on your credit worthiness when you're 30 days late, 60 days late, 90 days late, etc., with each one worse for your credit than the one before.

There's undoubtedly a scam to be had, but without running debt/credit simulations, I would wager you couldn't make it very far before your resultant credit made you ineligible for any credit whatsoever.

noonespecial3• 13 years ago

This demonstrates an interesting thing about medical debt in particular. They seem to be operating it almost like a market segmentation tool. The richest people simply pay the stated rate, everyone else pays the maximum rate that they are able as it travels down the debt staircase.

A more cynical way to look at it? When you get (really) sick, the price for care is everything you have, whatever that happens to be.

travem• 13 years ago

Welcome to the joys of a market based approach to healthcare when there is inelastic demand.

iambateman6• 13 years ago

That sentence has tons of insight on the problem of health care. Thanks.

As an aside, is there not some elasticity to medical care? People demand more health care for small problems when the price is lower.

thatthatis5• 13 years ago

the price for care is everything you have, whatever that happens to be.

Still seems preferable to dying.

debacle2• 13 years ago

Wait until you have dependents to care for - then suddenly the choice is between paying for your medical care and feeding your family.

pessimizer2• 13 years ago

Not if you have kids and your life insurance is better than your health insurance.

grecy2• 13 years ago

Comparing paying for health care to dying in a developed country in the year 2013 is a disgrace. It sounds like you're talking about an undeveloped hell-hole.

bcoates2• 13 years ago

The medical sector in the US operates this way openly, most medical providers have some sort of ability-to-pay based fee and payment schedule, if you ask. The big advantage over just taking on the debt and not paying it is that you can preserve your credit.

gknoy• 13 years ago

How do you start to ask that question? They give you a bill for X, Y, Z, and a doctor's bill for Q, and radiologist's bill for F, and ... then what? Do you ask each of them if they can discount it further? (I would have imagined that each of them have had so many people ask for a discount that their standard answer is "No!" by now -- am I just being too scared of asking?

ffrryuu2• 13 years ago

One of things that I was always curious about is why the govt didn't restructure mortgage debt and re-value property back to pre-bubble levels

It would have cost the government $2 trillion to buy every sub-prime mortgage and retire it.

But that's Communism

Instead, the government (by way of the private bank known as "The Fed") gave $16 trillion - free and with no strings attached - to Wall Street, the very people who engineered the destruction of the American economy in 2008.

That's known as Capitalism

frezik2• 13 years ago

US GDP in 2012 was $15.68 trillion. You're saying the US government gave away more than a year's worth of productive output? You'll excuse me if I say citation fucking needed.

davvolun3• 13 years ago

That's a very good question, here's a little of what I found: http://www.investopedia.com/financial-edge/1111/how-much-has... . Less than $1 trillion total (under any estimate), bordering on having broken even or made the money back.

cmdkeen• 13 years ago

They lent the money, they didn't "give it" to the banks. The difference is that the Fed got the money back, whereas buying $2tn of debt would result in the Fed having to create $2tn.

http://www.forbes.com/sites/traceygreenstein/2011/09/20/the-...

ubernostrum2• 13 years ago

IIRC Oakland is looking into using eminent domain to seize mortgages (not the physical property that's mortgaged, but the mortgages themselves) so it can then forcibly refinance them on terms better to the borrowers.

malyk• 13 years ago

I believe the city of Richmond, CA (in the bay area, green party mayor) has already passed a provision to use eminent domain for the same reason. Oakland is following their lead.

harryh• 13 years ago

Did they ever figure out of the beneficiaries of this plan were going to have tax problems? When the idea was originally floated 6-12 months ago I remember that being a potentially large problem.

saraid2162• 13 years ago

Their lawyers said it wouldn't be an issue, IIRC. I don't know the details.

byoung2• 13 years ago

http://www.irs.gov/publications/p4681/index.html#en_US_2013_...

In most cases, you do not have income from canceled debt if the debt is canceled as a gift, bequest, devise, or inheritance.

nostromo2• 13 years 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?

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?

chadillac83• 13 years ago

I love this idea, I can't wait to default on all of my loans!

JumpCrisscross• 13 years 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).

davvolun3• 13 years 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• 13 years ago

Well, perhaps lenders would be a little more careful about who they give money to.

fleitz2• 13 years ago

What if I told you that you don't need to borrow money to live a comfortable life?

debacle2• 13 years 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• 13 years ago

Limiting moral hazard is what keeps our insurance/finance/debt system churning

Citation needed.

pacofvf• 13 years 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.

Miner49er• 13 years 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.

dchmiel3• 13 years 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_watcher2• 13 years 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.

bwilliams18• 13 years ago

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.

jerf2• 13 years ago

"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.

dreamfactory3• 13 years ago

Think student loans never existing.

You mean free tuition for all like we used to have?

Perseids2• 13 years ago

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.

PeterisP5• 13 years ago

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.

AUmrysh• 13 years ago

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.

gshubert17• 13 years 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.

nostromo2• 13 years 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.

ChuckMcM4• 13 years 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.

mikeash3• 13 years 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• 13 years 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.

alan_cx• 13 years 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.

dragonwriter5• 13 years ago

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.

rtpg4• 13 years ago

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.

tekalon• 13 years 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.

_pius2• 13 years 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.

Zigurd3• 13 years 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.

daemin3• 13 years 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• 13 years 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?

goggles992• 13 years 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.

rrrhys• 13 years 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).

unclebucknasty10• 13 years ago

What's the consequence now for being a deadbeat, and how would this consequence materially change if this were law?

rtpg4• 13 years 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.

e12e4• 13 years ago

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.

yetanotherphd5• 13 years 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.

unclebucknasty10• 13 years 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.

kansface3• 13 years ago

Why wouldn't debtors always default?

vidarh3• 13 years 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• 13 years 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• 13 years 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• 13 years 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.

thatthatis5• 13 years ago

Can anyone explain where to go to buy debt like this?

jes51992• 13 years ago

http://rollingjubilee.org/

tehwalrus• 13 years ago

way to put your money where your mouth is. My respect for the Occupy movement just went up by an order of magnitude.

jbnelson• 13 years ago

The Occupy Wall Street movement is frequently criticized as ineffectual, especially when compared to the Tea Party. (Here, ineffectual refers to their ability to induce legislative or regulatory change aligned with their respective movement; it is not a normative statement.) Adherents of OWS often state that it is a consequence of their movement's organic character or that it is intentional. (I find the later argument incredulous, kind of like saying, "I lost, but I wasn't really trying that hard.") In either case, this tactic could be highly persuasive.

Ross says,

   Our purpose in doing this, aside from helping some people along the way – there's certainly many, many people who are very thankful that their debts are abolished – our primary purpose was to spread information about the workings of this secondary debt market.

I suspect that spreading information about the "workings of the secondary debt market" is a very tall task. Certainly, they are getting a great deal of publicity, but I'm not convinced it will produce a lasting response. Yet, they have also purchased what I expect would be an atypically strong allegiance from almost 3,000 direct beneficiaries at about $5,000 each. They transmuted economic indebtedness for social obligation, by way of the rule of reciprocity. When you consider how vehemently, vocally, and persistently these individuals are likely to support OWS and their objectives, the influence purchased may be cheaper than traditional means (e.g. TV ads, direct mail, etc). And, it could be indirectly translated into more influence through votes.

mathattack• 13 years ago

The unintended consequence of this activity is that if people start negotiating their debt down, the collection firms will pay less for it. As a result, the least credit-worthy are going to have to pay even more for credit, or will be less likely to get credit at all.

malandrew3• 13 years ago

The biggest problem with this is that they just generating a taxable event and these people now owe taxes on the "income" they received from being pardoned.

saraid2162• 13 years ago

AFAIK, their lawyers checked to make sure this wouldn't happen beforehand. During the discussion of this when it started, I saw a mention that they had actually consulted the IRS directly on the matter and were told it would not do so.

A quick search yielded me these statements:

http://my.firedoglake.com/phoenix/2012/11/18/will-ows-rollin...

brianbreslin2• 13 years ago

Here is an idea, to steal from their idea I guess. What if we kickstarted a campaign to raise $50-100M to buy off random people's debts this same way they did? Target areas where people are hardest hit financially, softening the burden in those places a teeny bit?

Could also be used for buying up grossly underwater properties and issuing new loans to help people? Just a thought.

evan_2• 13 years ago

That's exactly what they're already doing. You can contribute to their operation: http://rollingjubilee.org/#contribute

insaneirish• 13 years ago

Great idea. Why should people have to be held responsible for their actions?

rurounijones• 13 years ago

Damn straight! If someone in the US gets sick or is in an accident[1] they should suck it up and be responsible for things they cannot control / were not their fault; even if it bankrupts them.

[1] RollingJubilee pays mainly medical debts.

dragonwriter5• 13 years ago

Here is an idea, to steal from their idea I guess. What if we kickstarted a campaign to raise $50-100M to buy off random people's debts this same way they did?

The more money you raise for that purpose, the more you'll increase the market value of the targetted kinds of debt. Succeed enough, and you'll create a credit bubble that pops when the influx of money runs out.

evan_2• 13 years ago

I wonder how long until we find out that this is actually being operated by the very banks that own the debt.

kingmanaz• 13 years ago

From Plutarch's "Lucullus":

"Lucullus now turned his attention to the cities in Asia, in order that, while he was at leisure from military enterprises, he might do something for the furtherance of justice and law. Through long lack of these, unspeakable and incredible misfortunes were rife in the province. Its people were plundered and reduced to slavery by the tax-gatherers and money-lenders. Families were forced to sell their comely sons and virgin daughters, and cities their votive offerings, pictures, and sacred statues. At last men had to surrender to their creditors and serve them as slaves, but what preceded this was far worse, — tortures of rope, barrier, and horse; standing under the open sky in the blazing sun of summer, and in winter, being thrust into mud or ice. Slavery seemed, by comparison, to be disburdenment and peace. Such were the evils which Lucullus found in the cities, and in a short time he freed the oppressed from all of them."

"In the first place, he ordered that the monthly rate of interest should be reckoned at one per cent., and no more; in the second place, he cut off all interest that exceeded the principal; third, and most important of all, he ordained that the lender should receive not more than the fourth part of his debtor's income, and any lender who added interest to principal was deprived of the whole. Thus, in less than four years' time, the debts were all paid, and the properties restored to their owners unencumbered. This public debt had its origin in the twenty thousand talents which Sulla had laid upon Asia as a contribution, and twice this amount had been paid back to the money-lenders. Yet now, by reckoning usurious interest, they had brought the total debt up to a hundred and twenty thousand talents. These men, accordingly, considered themselves outraged, and raised a clamour against Lucullus at Rome. They also bribed some of the tribunes to proceed against him, being men of great influence, who had got many of the active politicians into their debt. Lucullus, however, was not only beloved by the peoples whom he had benefited, nay, other provinces also longed to have him set over them, and felicitated those whose good fortune it was to have such a governor."

http://penelope.uchicago.edu/Thayer/E/Roman/Texts/Plutarch/L...

bdcravens• 13 years ago

I wonder what the legality of a consumer debt collective would be.

knodi• 13 years ago

Where can an individual go to buy debt. I would love to buy some debt and forgive it for Christmas this year.

kevin_rubyhouse3• 13 years ago

http://rollingjubilee.org/

biot• 13 years ago

It would be interesting had they sent letters to those whose debt they bought and explained exactly what they were doing. Then offer them one of three options:

  1. Pay 10 cents on the dollar. This covers their family's
     debt and they pay it forward for two other families.

  2. Pay 5 cents on the dollar. This covers them and they pay
     it forward to one other family.

  3. Pay nothing. Their debt is forgiven thanks to another
     family having paid it forward.

If enough people opted for #1 or #2, the fund could be self-renewing and they could purchase ever-larger amounts of debt and keep it going.

kansface3• 13 years ago

This could never be self sustaining because it would increase the cost of debt (if the debtors could pay, it wouldn't have been sold).

avalaunch• 13 years ago

If the debtors could pay 100% of what they owed it wouldn't have been sold. But the OP is suggesting that some of the debtors might be able and willing to pay 5 cents or even 10 cents on the dollar, which I think is a reasonable assumption.

downandout• 13 years ago

That's all well and good until the IRS comes after these people for taxes on the value of the forgiven debt. Occupy essentially just indebted them to a much more formidable foe than a bill collector that must play by strict rules: the IRS.

kirbyk• 13 years ago

Why can't we scale this? Why aren't there nonforprofit's that allow people to donate and alleviate peoples debt?

tete• 13 years ago

Wow, did you see that chart in their manual (page 32, PDF-wise or page 24 printed):

http://strikedebt.org/The-Debt-Resistors-Operations-Manual.p...

brianbreslin2• 13 years ago

what percentage of personal debt is medical related? That is typically the clearest case of "life threw them a curve-ball" situations where it was completely out of their control (usually).

Occupy Wall Street activists buy $15m of Americans' personal debt

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