If A borrows from B, A now owes B
Then C shows up and pays B with the agreement that it settled A’s debt to B.
A does not know any agreement was made but the original A owes B
A goes to pay B.
B says A doesnt owe B.
C says A owes C
But A did not make an agreement that he owed C.
How does A owe C now?
It seems to me that: C gave A the gift of settling A’s debt to B.
In: Economics
It’s not quite like that. C doesn’t “settle” As debt.
Imagine you’re lending money to your friend, John. John takes $5 from you and hands you a note. “I owe you $5 plus interest” but doesn’t say your name. You have a lot of space on the page to change the amount John owes you, to keep track of how much is left.
It’s been a year John is paying back the $5, but only a dime per month. You realize it’s going to take FOREVER for John to pay you back. Based on interest he owes you an extra $0.20 You could try and hurry him along, but your friend Anthony offers you $4 for the IOU note. You hand him the note and he hands you $4.50
Now you’ve gotten paid $1.20, plus the $4 that Anthony paid you. Nice profit! You’ve been keeping track of how much is left on the note and now Anthony sees there is, $4 left. At the end of paying off the note he’ll make some more money from interest.
All that changes for John is who he sends the check too. He still owes that money. And if he doesn’t pay it Anthony can go try and get it back.
Lenders can sell debt to others. It was real common prior to the mortgage crisis in 2010. Big banks found it was more profitable to sell blocks of high risk mortgages to other lenders than to hold them.
Lenders can also sell bad debt to collectors who pay them a fraction of the outstanding balance then try to collect from the borrower.
So, think of the debt as a physical object. In fact it is a physical object. When A gets a loan from B, A signs what is called a promissory note. This is a contract and a promise to pay B a certain amount of money in a certain time frame, subject to conditions such as interest and maybe a repayment schedule. Basically this is an IOU. That note can be bought and sold just like any other piece of property. The note entitles the holder to collect the payments from A.
Person C is NOT settling the debt of person A with person B. They are purchasing the right to collect the debt from B. There are many reasons to do this. Maybe person A isn’t paying on time and person B is tired of dealing with it. Or maybe person B needs liquidity for their business to make payroll and can’t wait for the term of the loan to expire to collect the remaining money. In these cases the note is often worth less than the remaining value. Lets say that person A still owes $100 to person B. Person B could offer to sell the note to person C for $75 cash today. If person C can wait to collect the full $100 they just made $25 profit and person B now as $75 in cash that they would not have had until the loan matured.
>But A did not make an agreement that he owed C.
A agreed when signing the terms and conditions of the initial loan that it was sellable/transferable.
B sold the right to profit intrest money from A
for C, if A wont deflaut his debt, C will profit the diffrence between what he paid B and what he will get from A
Real fun begins when C has a lot of those debt notes (bonds) and can create more money that he has by selling toxic waste that is CDO- and only those who read repports of each single original loan taker credit history will actually know what given CDO contains.
So investors buying CDO (party D in this scenario) are betting against deflaut rate ( how much A’s will actualy pay in full?) and it can go multiple levels and CDO can contain parts of other CDO (CDO^2 or even CDO^3).
Basically 20th century released worst thing in history of capitalism, fractional reserve banking, where debt is money
So most people work to pay their debt with debts of other entities.
First of all, going waaaay back to the very earliest uses of writing in Mesopotamia, people have found it useful to handle debts by writing them down. Instead of A making a verbal agreement with B to borrow some money, in exchange for some cash A signs a note saying they’ll pay back X amount of money to B.
Now, lenders find it useful for many reasons to be able to sell debt. So when A goes around looking to borrow money, he will wind up signing a note that says “I owe the owner of this note money” not “I owe B money”. Why would he do this? Well, it’s all the same to him, and also he can probably get a better rate, people would charge extra if he insisted debt couldn’t be transferred.
And since that’s what the note says, that’s what the agreement means. The money isn’t owed to B, it’s owed to the owner of the note, so B can sell it to C.
A doesn’t have to consent to the sale between B and C for it to be legal, typically, when loans are originally made between A and B there is a clause which allows B to sell or transfer the debt to someone else. C didn’t buy the debt off of B as a “gift,” they bought it with the expectation that they will be able to collect the money owed
The fun part about this whole thing is that it’s how some organisations have been able wipe tens of millions in medical debt by buying the debt for pennies on the dollar. Hell, there’s an NY non-profit org called RIP Medical Debt that tracks bundled debt portfolios that are being sold off and swoop in to buy them.
Whoever you owed money to doesn’t think you’ll ever pay them back; aren’t willing to harass you for it (they don’t specialize in this); and it’s probably a small amount; and so they’re happy to just get anything back for the debt (they get less than you owe.)
On the other hand: the debt collectors entire business model and skill set revolve around collecting debts as efficiently (and annoyingly) as possible. They make money because the full amount you owe is more than they paid for it.
If a debt collector ends up buying your debt you can expect far more harassment than if you owe a random company the debt. They know every trick, every way to get to you, and won’t stop until the debts paid.
The reason it works is usually there is verbal in the contract A signs with B that B can transfer the remaing debt to a third party (C). Without needing consent of A. And that A will now owe C the remaining debt.
So if C want B to transfer the debt then they need to offer something in return. IE buying the debt.
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