That seems simple and fair at first, but I think it actually creates more problems than it solves.
First, you get a horrible incentive to not repay debts:
1. A relatively innocent and good-natured Bank lends a jerk $1.00
2. The jerk refuses to pay it back, knowing the bank can't transfer it to someone who isn't a pushover without giving him a steeply-discounted offer first
3. In response all loan requirements and interest rates rise for everybody
Secondly, it fucks up the negotiations, because would-be buyers can infer something when the creditor doesn't snap up their own debt:
1. The Bank offers the debt for $0.10
2. The debtor doesn't repay because he legitimately can't scrape up that much
3. The Bank offers the debt for $0.10, but nobody wants to buy it, because they can infer that the debtor has nothing
4. The Bank offers the debt for $0.09... (begin loop)
Thirdly, it's a logistical nightmare. The Bank can't just combine the debt of it's 1000 deadbeat debtors and sell it off to a debt collection agency for a lump sum. No, it needs to send 1000 mailing notifications and 1000 second-notifications and wait 30 days, etc... And then 120 of them buy their own debts, and the bank can't re-price it's set of 880 accounts without sending 880 mailing notifications (begin loop)
Fourth, what happens if it's not a straight sale? Suppose the Bank barters your debt to a collection agency for a thing (like privately-held stock) in the collection agency? You can't buy your debt because you can't provide what the Bank is looking for... And then the bank can just sell whatever-it-is later.
TLDR: Exploding legal complexity combined with shady/manipulative actions from everybody.
Your credit score (and collateral, if it's a secured loan) is your incentive to repay the debt at face value. So I disagree that people would choose to default just because they can get it for pennies on the dollar. And given the ability of people to do that would be rather limited (as after the first time they'd have shot their credit score) it doesn't seem like it would create any sort of unworkable problems for the industry.
>First, you get a horrible incentive to not repay debts
Isn't that what credit ratings are for? You'd be able to do this exactly once for any meaningful amount of money, and then your financial life would be otherwise over.
You can walk away from hundreds of thousands of dollars in mortgage debt and still have a 700 credit score, all of your credit cards, and the ability to still get credit.
Defaulting on debt doesn't mean your financial life is over by any means.
There's already a big incentive not to repay debts. Some places give up without doing anything, some will offer to discount your debt even before sending it to collections. This might make the incentive a little worse, but the jerk would still get the negative credit report entry, which is presumably the bigger punishment than having to dodge some collector for a while.
Regarding the latter, I expect the stable solution is that the bank offers a package of 1000 items, the agency offers a price per dollar of debt, and 14 days later the agency receives the 880 accounts and pays on a per debt-dollar basis. It adds some risk, but debt collection agencies are experts at pricing risk.
There are other mechanisms for price discovery here that can avoid some of the downsides you describe. It needn't be a offer/counter-offer process where both sides see the numbers.
No, prices would NOT be discovered quickly, because the bank cannot proceed without getting a response from the debtor... or waiting long enough that they can legally treat it as rejected.
That probably means at least two or three snail-mail notifications and a month of waiting time... Defaulting debtors correlate heavily with people who cannot be contacted or will not respond.
In addition to the credit issues the other commenters noted, there is the issue of taxes in the case of "chargeoffs." One will get an income statement from the credit issuer for the fraction of the debt they write off.
Odds are if one is in the position of having debt collectors come after them they'll be unlikely to afford the taxes on the "income."
Sometimes the debt is bullshit, but it might be easier to buy it for a small percentage than to pay it off. We get letters for a medical debt that's factually wrong, but by the time we convince Debt Agency N that we don't actually owe it, they've sold it off to Debt Agency N+1 for 1/10th of what they claim we owe them (which is already 1/10th of what was originally 'owed'.)
It would be well worth paying 1/100th of the original bill to not have to check the mail anymore, and throw that garbage away, but if we were to actually PAY the 1/10th settlement amount, it would open us to liability for the WHOLE amount.
tldr, I'm willing to be extorted, but not ludicrously so.
I'll tell you, you're playing that game wrong. It's not your job to convince them of anything. The next time they sell, and you get the initial dunning letter, you should write back a simple letter with your name and address stating that you refute this debt, and demand that they validate the debt as they are required to do under § 809 of the FDCPA [15 USC 1692g]. The burden of proof is on them.
You only have 30 days to do a so-called "timely" validation, but you can force past CA's to validate as well -- the only hitch is that they can continue to collect on you while they validate, something they cannot do if you demand timely validation.
One more tip: Don't sign your name on letters to CAs, and don't ever give them ANY information they don't already own. Ever. Especially your bank account information. If you do decide to pay them (hopefully strategically as part of a pay-for-deletion-from-credit-report arrangement), don't pay them on a bank draft. And send it certified mail return receipt requested.
"don't ever give them ANY information they don't already own."
When I called the State Of Michigan treasury to pay a bill I'd hadn't known about (having not lived in the state for years), they forwarded me to a collection agency without telling me up front. I was confronted with "we have to ask you some questions for verification" and answered them until they asked something I knew they couldn't already know. I felt seriously taken advantage of, at all levels.
Everyone should understand the FDCPA. Once invoked, any legitimate debt collection company will get in line. The problem ones are the fly by night places being run out of a strip mall.
Exactly. Buying your debt off for a penny on the dollar is probably the stupidest thing you could do financially. You would be trading $10,000 in credit card debt, with a fair amount of legal protections, for $4,000 in IRS debt with very few legal protections.
If you purchased a liquid asset with the $10,000 (and your creditors never found out about it in time to sue you for it), couldn't you just reliquidate it at that point and use it to pay off the IRS debt, leaving you with pure profit (and a horrible credit score)?
Actually, wait, maybe not even that: given that you purchased the debt, you could legally mark it (as the creditor) as having been repaid and then petition (as the debtor) to have your credit score corrected, no? This is what the http://rollingjubilee.org people are doing, at least.
Repaying negative status debts does not necessarily improve one's credit score. You can ask the credit reporting agencies to reflect the fact that you've paid it, but this is a no-op for virtually everything except mortgage applications.
> You would be trading $10,000 in credit card debt, with a fair amount of legal protections, for $4,000 in IRS debt with very few legal protections.
Forgiven debt is taxed as normal income, so you'd have to have a 40% marginal federal income tax rate to end up with $4,000 in IRS debt on $10,000 of forgiven consumer debt, which is an approximation of the maximum marginal rate being 39.6% (which kicks in at $400K income for a single taxpayer.)
I would hazard to guess that people that would be paying anywhere close to a 40% marginal federal tax rate aren't really sweating $10K credit card balances.
I can also just wait out the debt period, until it passes the statute of limitations, and not pay anything at all - but I don't, because I prefer having a decent credit score and businesses who will do business with me.
I would suspect most of the people who are defaulting on debts don't have significant assets or income to make it easy to recover debts, even with a court order.
The option to sue is reasonable because otherwise people who are too rich to need credit would often find themselves in positions where there's little-to-no incentive to pay back. But these aren't the bulk of debts that these agencies are working with - the bulk of people who are defaulting on loans aren't people with money, they're people without money.
Frankly the harassment techniques that a lot of debt collectors use are disgusting and they prey on those who already are suffering. The FDCPA makes a lot of these techniques illegal, but the protections the law provides aren't widely known.
Most people on HN exist in a very different world from the unbanked population. Credit scores mean nothing to these people. Many can't even get approved for a checking account and rely primarily on cash equivalents and prepaid products.
Sometimes getting rid of the debt means that you can begin to restart. Of course, it won't help you afford a non-free checking account nor pay bills, but it can lead to marginally better jobs and nicer housing for the price. Sometimes that price is worth it because it brings a bit more piece of mind - no more phone calls and letters. A good number of unbanked aren't even as poor as you might expect - things have happened and they can't get to a point to restart.
And some people, no. No they wouldn't care. Like most people, it depends on life situation.
> Then why would anyone pay their bills if they can buy their debt back for 1/10th of what they owe?
If self-purchase looked on a credit report just like settlement-for-less-than-full-amount (and was taxed like forgiveness), there'd still be considerable reason to in order to maintain creditworthiness.
The moral hazard involved [wait 181 days for them to sell it on all debts] is huge.
Its a workable system if and only if you are willing to basically cut off credit for anyone who hits that 181 days on a debt milestone. Because no one will loan to them again for years.
For example, if you're about to sell $1.00 worth of my debt to someone for $0.10, first you must offer it to me at the same cost: $0.10.