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?
In: 4529
Let’s say you go out to eat with some friends (Bob, Larry, and you)
Bob doesn’t have money, but asks if he could borrow $20 from you.
You say okay, and Bob writes you a little piece of paper that says “Bob owes you $20”
The debt is created.
Now, you try for some time to get the money from Bob.
But Bob is dodging your calls and just not paying up.
You get pretty frustrated at Bob.
You think this $20 is a loss.
You run into Larry one day and tell Larry your story.
Larry says “I think I can get the money from him. How about I give you $10 and Bob doesn’t you money anymore. He owes me… give that paper Bob gave you”
You think about it and say Ok.
Larry just bought Bob’s debt to you for half price.
Now if Larry is able to get Bob to pay the full $20.
He makes a nice $10 profit for his trouble.
If not, he takes a $10 loss.
That’s the game of debt collection agencies.
They buy debt at a big discount and hope to turn a profit by collecting something.
Now, why can’t you just buy your own debt?
If you had the money, you absolutely could get the same result. This is called negotiating your debt. Remember, the only reason you even sold your debt to Larry was because you couldn’t get Bob to pay despite spending time trying to get it from him. Bob could have called you anytime and said “Listen…I really don’t have $20. I just don’t have the money bro. You know times are tough and I don’t even have a job. How about I give you $10 and we call it even.” Most lenders would rather have an easy negotiation as opposed to going to collections because they’d probably get more money. It costs them money to send you letters, call you, have their staff bothering you about the debt. The more effort in time and labor they spend trying to get money out of you, the more it costs them. Eventually they will say screw it and send it to collections.
The other reason is that before they send it to collections at a really low rate… like pennies on the dollar, they generally want it out and done. So they will probably have a contract with a collections agency or sell a whole bunch of debt in one go. Remember the collection agency might buy 1000 debts at one time. They might be able to collect on some of those and not collect on others. That’s why they get a very discounted rate. They’re taking on a very risky proposal and giving the company a guaranteed fixed payment. If you have the money to pay 1000 people’s debt (even at a discounted rate)… you probably could have already paid your own. And you’re probably not big or wealthy enough to have collection agency contracts…
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