Random idea: If a creditor is about to sell your debt to a debt collector for pennies on the dollar, what if they were forced, by law, to give you right of first refusal?
For example: I owe a credit card company $20k, but I have defaulted on the loan. The credit card company is about to sell this debt to a collector for $1k, who will proceed to make my life miserable. If there were such a law, the credit card company would first have to offer the debt to me for $1k. In this scenario, I could indeed buy my own debt and we all could go on our merry way (except the debt collector).
Aside from the other problems mentioned, one big problem that comes to mind is that, assuming a functional legal system that is able to actually put freezes on debtors' assets, a defaulting loan should always be worth more than what the debtor could pay for it.
Random example with arbitrary concrete numbers: let's say you owe $100,000 and you could afford to buy the debt for $1,000. However, that's also $1,000 available to pay toward your debt. If the creditor can be assured of getting that $1,000, then the debt is worth at least that much. And unless you're completely destitute with no prospects of ever earning any money ever again, it's worth more, because you'll have income with which to pay more in the future.
So in theory, if you can pay $1,000 to buy your own debt, somebody else should be willing to bid at least $1,001.
There's a lot that complicates this (expense and uncertainty of collecting assets through the legal system and such) but it's a thought.
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.
Huge moral hazard. Limiting moral hazard is what keeps our insurance/finance/debt system churning.
That said, lobbyists pay politicians and the media to help them believe that the people who are in a position to benefit most from moral hazard are also immune to it - something which has shown to be not the case.
This already exists, its called debt negotiation and they advertise the crap out of it.
Basically they take someone with a ton of debt who already has destroyed credit, and have them pay into a trust every month instead of paying their credit card bills. Every so often the company calls up a card issuer and tries to negotiate along the lines of "I have these N people with $10,000 in debt each, will you take $1,000 cash from each of them today?"
The super sneaky part is that after they have settled all your debt, your credit is totally hosed. However you've made good on 36 or so monthly payments to them, so they know you can continue to pay them and you are now free of other debts, and will issue you credit based on this insider knowledge (which you accept because they are the only ones willing to extend you credit at this point).
When loans are forgiven by borrowers, the difference is treated as taxable income by the IRS (in the US). This would complicate your scenario somewhat, but the debtor would still be better off paying the taxes on the $19K than the entire original debt.
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.
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.
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.
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.
In many ways the creditor does do that (and even the debt collector). Send them a letter that you are willing to pay them the 1k up front, and they will actually be pretty willing to accept it.
It could be argued that perhaps it is not such a good idea to base money on debt. But it has managed to get the job done, largely because people can still be expected to pay debts in full. This expectation largely holds because the system is set up so that paying in full is by far the most attractive option.
The thing about your system is that under it, paying debts in full doesn't make any sense. You could just hold out for a settlement, pay far less than what you'd borrowed at that time, and leave the creditor holding the bag for the rest. When paying in full doesn't make any sense, lending doesn't make any sense either. When lending doesn't make any sense, then a system of money based on debt is doomed to collapse.
One possible way to mitigate this is to set it up so that the debtor earns the legal right to first refusal when, over the lifetime of the debt to date, an amount of money equal to the original principal (or maybe the principal plus some multiple of the APR) has been paid into it. That would prevent the worst abuses of first refusal, because you don't get it until the lender has at least recouped its initial investment. But it doesn't completely solve the problem.
But then banks would have less incentive to give out loans. You wouldn't have to pay back loans, just wait until you can purchase your debt for a fraction of the cost. Banks could then counter this by holding on to all debt, but this means giving out loans would be an even greater risk to them. This isn't necessarily a bad thing, though.
Yes as there woudl be a perverse incentives to default -
The issue of moral hazard comes into play.
It woudl lead to increased costs for everyone applying for credit the lender woudl have to make more on good debtors to make it worth while to lend to anyone.
If this was a law, everyone would run up a bunch of debt and settle it for pennies on the dollar (nearly free money). How could a credit system survive if there is little consequence for being a dead beat?
Why don't I just borrow a million dollars, buy gold with it and bury most of it in a field. When they come for it, I'll just give them $1000 and then go dig up the gold and retire.
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.
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.
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?
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?
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.
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.
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.
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.
"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."
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.
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.
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.
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.
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.
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.
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.
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.
[+] [-] nostromo|12 years ago|reply
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?
[+] [-] mikeash|12 years ago|reply
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.
[+] [-] dchmiel|12 years ago|reply
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.
[+] [-] debacle|12 years ago|reply
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.
[+] [-] dsl|12 years ago|reply
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).
[+] [-] gshubert17|12 years ago|reply
[+] [-] _pius|12 years ago|reply
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.
[+] [-] daemin|12 years ago|reply
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.
[+] [-] vidarh|12 years ago|reply
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.
[+] [-] chadillac83|12 years ago|reply
[+] [-] yetanotherphd|12 years ago|reply
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.
[+] [-] tekalon|12 years ago|reply
[+] [-] Millennium|12 years ago|reply
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.
[+] [-] Miner49er|12 years ago|reply
[+] [-] walshemj|12 years ago|reply
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.
[+] [-] kansface|12 years ago|reply
[+] [-] goggles99|12 years ago|reply
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.
[+] [-] noonespecial|12 years ago|reply
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|12 years ago|reply
[+] [-] bcoates|12 years ago|reply
[+] [-] thatthatis|12 years ago|reply
Still seems preferable to dying.
[+] [-] pchristensen|12 years ago|reply
[+] [-] pradocchia|12 years ago|reply
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?
[+] [-] pan69|12 years ago|reply
[+] [-] Ilmesnkie_Jones|12 years ago|reply
[+] [-] mempko|12 years ago|reply
[+] [-] dnautics|12 years ago|reply
[+] [-] benched|12 years ago|reply
[+] [-] ffrryuu|12 years ago|reply
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
[+] [-] frezik|12 years ago|reply
[+] [-] ubernostrum|12 years ago|reply
[+] [-] kingmanaz|12 years ago|reply
"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...
[+] [-] biot|12 years ago|reply
[+] [-] harryh|12 years ago|reply
[+] [-] LukeWalsh|12 years ago|reply
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.
[+] [-] wil421|12 years ago|reply
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?
[+] [-] krupan|12 years ago|reply
[+] [-] downandout|12 years ago|reply
[+] [-] jbnelson|12 years ago|reply
Ross says,
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.[+] [-] Symmetry|12 years ago|reply
[+] [-] thatthatis|12 years ago|reply
[+] [-] jes5199|12 years ago|reply
[+] [-] tehwalrus|12 years ago|reply
[+] [-] brianbreslin|12 years ago|reply
Could also be used for buying up grossly underwater properties and issuing new loans to help people? Just a thought.
[+] [-] evan_|12 years ago|reply
[+] [-] insaneirish|12 years ago|reply
[+] [-] tete|12 years ago|reply
http://strikedebt.org/The-Debt-Resistors-Operations-Manual.p...
[+] [-] malandrew|12 years ago|reply
[+] [-] unknown|12 years ago|reply
[deleted]
[+] [-] knodi|12 years ago|reply