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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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…
At the point the debt is bought, it’s already been reported as a written off account and harmed your credit score/report.
If you could buy your own debt at pennies on the dollar, then people would just make the practice of doing so until banks just stop lending to people or jack up the interest rates to extreme levels.
>why can’t someone just purchase their own debt for a fraction of the cost
To purchase it, you need to come to an agreement on price with the person selling it (otherwise, if they don’t agree, it’s called robbery). Why would they sell it to you for a fraction of what it’s worth?
For what it’s worth, you sort of can do this.
My parents dug themselves into a debt hole and were heading towards bankruptcy. I stepped in and called each creditor. Let’s say they owed $5000 and they were paying $100/month. I’d tell the creditor that they were facing bankruptcy, and that I was able to pay $2000 in a lump sum now to completely cancel the debt. Otherwise we’d start missing payments and who knows what would happen. They might make a counter offer of $3000 and maybe I’d take it or I’d say $2000 was our maximum budget. In the end I think I cleared some $20k in debts for about $8k. I don’t know what it did to their credit, but it got them out of a downward spiral. I was then able to set them up on a budget with a debit card that only had free spending money on it (bills were paid out before money went to the debit accoutn) and didn’t do overdraft. They didn’t love it, but it kept them from ending up on the street.
At the point the debt is bought, it’s already been reported as a written off account and harmed your credit score/report.
If you could buy your own debt at pennies on the dollar, then people would just make the practice of doing so until banks just stop lending to people or jack up the interest rates to extreme levels.
For what it’s worth, you sort of can do this.
My parents dug themselves into a debt hole and were heading towards bankruptcy. I stepped in and called each creditor. Let’s say they owed $5000 and they were paying $100/month. I’d tell the creditor that they were facing bankruptcy, and that I was able to pay $2000 in a lump sum now to completely cancel the debt. Otherwise we’d start missing payments and who knows what would happen. They might make a counter offer of $3000 and maybe I’d take it or I’d say $2000 was our maximum budget. In the end I think I cleared some $20k in debts for about $8k. I don’t know what it did to their credit, but it got them out of a downward spiral. I was then able to set them up on a budget with a debit card that only had free spending money on it (bills were paid out before money went to the debit accoutn) and didn’t do overdraft. They didn’t love it, but it kept them from ending up on the street.
For what it’s worth, you sort of can do this.
My parents dug themselves into a debt hole and were heading towards bankruptcy. I stepped in and called each creditor. Let’s say they owed $5000 and they were paying $100/month. I’d tell the creditor that they were facing bankruptcy, and that I was able to pay $2000 in a lump sum now to completely cancel the debt. Otherwise we’d start missing payments and who knows what would happen. They might make a counter offer of $3000 and maybe I’d take it or I’d say $2000 was our maximum budget. In the end I think I cleared some $20k in debts for about $8k. I don’t know what it did to their credit, but it got them out of a downward spiral. I was then able to set them up on a budget with a debit card that only had free spending money on it (bills were paid out before money went to the debit accoutn) and didn’t do overdraft. They didn’t love it, but it kept them from ending up on the street.
In essence, buying your own debt and canceling that debt is simply paying your bills.
If you are able to buy the debt for less than you owe it is simply negotiating your bill, which debt collectors absolutely will do on an individual basis.
In essence, buying your own debt and canceling that debt is simply paying your bills.
If you are able to buy the debt for less than you owe it is simply negotiating your bill, which debt collectors absolutely will do on an individual basis.
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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