I’ve seen stories of individuals buying up a bunch of debt for cents on the dollar then just forgiving it. Why can’t this been done on an individual scale?
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Bankruptcy and restructuring attorney here.
In most countries with Western legal systems, debt is created by specific forms of contracts, most typically *notes* or *bonds*. When I bought my house, I signed two primary debt instruments: a promissory *note* saying that I’ll pay back $X at Y% rate of interest over Z months, and a *mortgage* saying that if I don’t pay the debt I promised to pay pursuant to the note, then the *holder* of the note can foreclose on the collateral for the loan, i.e., my house.
But the *holder* does not have to be the original lender! In the U.S., there’s a specific body of law that governs the *assignment* (basically, the transfer, but only by the lender) of *commercial paper*, including notes. (It’s Article 3 of the Uniform Commercial Code, which is a state law that has been adopted in all 50 states in almost identical form.) Somewhat similar laws govern the assignment of bonds, and I’m not quite as familiar with those. However, the laws standardize bond assignments to the point that if you’re so inclined, you can even buy them on most retail brokerage Web sites. There was a time when I held corporate debt in my portfolio.
Without getting too deep into the specifics, with those laws in place, the note or bond can be traded like basically any other asset, and they frequently are. My debt is to the holder of the note/bond.
So why can’t I just purchase my debt for a fraction of the cost and cancel it myself? Simple. My lender isn’t going to sell it at that kind of discount. I’ve made every payment for however many years now, and I’ve got fewer than 5 years left until my house is paid off. Unless my lender were desperate for liquidity (which actually happened sometimes during the Great Recession, forcing banks to sell good debt at discounted prices), they’re not going to sell that for less than face value. They’d only sell it for pretty close to 100 cents on the dollar. In general, steep discounts on debt will only be found when debt is either already in default or the lender has reason to know that there is an elevated default risk (e.g., the borrower is in forbearance).
In general, standard-form consumer loans (credit cards, home mortgages, private student loans) will be sold in bulk, not on an individual basis, just because the time involved in selling 1,000 individual loans would almost never be worth it to a typical financial firm. And if you’re a borrower in good standing, i.e., in the sense that your lender isn’t likely to sell you your own loan at a discount, there’s a much easier option: just prepay the loan. The effect is almost identical if you’re not getting a discount, and most borrowers won’t.
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