Recently heard of a church purchasing $3.3 million in resident debt for 15k and then cancelling all of it.
In: 9
Many people in debt simply do not have the money to be able to pay of the debt, and trying to chase them around to squeeze them dry is often just not worth it for large banks who have other things to do, so they sell of the debt so that it’s not a complete write off. And since this is obviously debt that isn’t _fully_ recoverable, and takes a decent effort to recover even some, it has to be sold below value otherwise no one would buy it.
The people who buy the debt then (usually) spend their time harassing and squeezing out the debtors, hoping that they can squeeze out enough money out of the debtors to achieve a return on investment.
### How does one purchase debt for less than it is worth?
Peter borrowed $10 from Paul. Paul has been asking Peter for the money for many years. Peter hasn’t paid up.
Along comes Patrick. Patrick tells Paul how about I pay you $5 and you transfer Peter’s IOU to me. I’ll find a way to collect from Peter.
Peter agrees.
This is the basics of how you can buy debt for “less” than it is worth.
### $3.3 million and $15k? Something sounds fishy!
In this case it is likely that there is some tax loop hole involved where the $3.3 million sold to the church at $15k is actually $15k in sale +$3.285 million of donation to the church in kind which has a nice tax benefit.
Debts have been made a commodity that is being traded in financial markets between different institutions. The debts are valued after what they think they can extract from them. For example if you have a $1000 credit card debt a company might figure they can spend $200 in phone calls, letters, investigations, etc. and still only get you to pay $300 of your debt. So they value the credit card debt to $100 and will pay this to your credit card company or whoever owns the debt.
The debt that this church bought were likely older debts to mostly very poor people and might have included a lot of late fees and such which would be hard to collect on. In order to collect on any of this debt you would have to spend quite a lot of resources and still not get much money from it. So the estimates for the debt were very low. This allowed the church to buy the debt for cheap but still could claim to have canceled lots of big debts. You see these kinds of PR stunts all the time.
Many people in debt simply do not have the money to be able to pay of the debt, and trying to chase them around to squeeze them dry is often just not worth it for large banks who have other things to do, so they sell of the debt so that it’s not a complete write off. And since this is obviously debt that isn’t _fully_ recoverable, and takes a decent effort to recover even some, it has to be sold below value otherwise no one would buy it.
The people who buy the debt then (usually) spend their time harassing and squeezing out the debtors, hoping that they can squeeze out enough money out of the debtors to achieve a return on investment.
So a company who issued the loans or the bills owns the debt but that doesn’t mean they have the money. If people aren’t paying, you have to go to collections and try to force them to pay. This takes time and money and carries the risk that the person will just declare bankruptcy and you’re out of the money entirely then. Some company may decided that it’s not worth the time, money, and risk to try to collect all those debts. So they will sell the debt to someone else who is willing to try to collect it (or in this case, just cancel it). Sometimes for a company it makes more sense to take a smaller guaranteed amount of money, then to bet on a risky higher payout.
People can owe companies and organizations money which realistically they will never pay back. Maybe some of them will pay eventually, or maybe they will pay partially, but some debts are just a lost cause.
Many companies don’t want to go through the hassle of trying to collect on such delinquent debts perpetually, or keep them on their books forever. Instead of simply writing them off entirely they can sell them to another organization for some small fraction of the amount of the debt. Getting something for the debt is better than nothing.
Buying a debt of $1000 for $50 then saying the debtor doesn’t need to pay you is kinda cool, it gives the debtor peace of mind I guess. But on the other hand whoever sold you that debt was pretty sure they were never going to pay in the first place, and the first debt-holder already reported their failure to pay to the credit agencies so they already saw their credit score go down. All they really were saved from is being hounded by debt collectors.
### How does one purchase debt for less than it is worth?
Peter borrowed $10 from Paul. Paul has been asking Peter for the money for many years. Peter hasn’t paid up.
Along comes Patrick. Patrick tells Paul how about I pay you $5 and you transfer Peter’s IOU to me. I’ll find a way to collect from Peter.
Peter agrees.
This is the basics of how you can buy debt for “less” than it is worth.
### $3.3 million and $15k? Something sounds fishy!
In this case it is likely that there is some tax loop hole involved where the $3.3 million sold to the church at $15k is actually $15k in sale +$3.285 million of donation to the church in kind which has a nice tax benefit.
Many people in debt simply do not have the money to be able to pay of the debt, and trying to chase them around to squeeze them dry is often just not worth it for large banks who have other things to do, so they sell of the debt so that it’s not a complete write off. And since this is obviously debt that isn’t _fully_ recoverable, and takes a decent effort to recover even some, it has to be sold below value otherwise no one would buy it.
The people who buy the debt then (usually) spend their time harassing and squeezing out the debtors, hoping that they can squeeze out enough money out of the debtors to achieve a return on investment.
So a company who issued the loans or the bills owns the debt but that doesn’t mean they have the money. If people aren’t paying, you have to go to collections and try to force them to pay. This takes time and money and carries the risk that the person will just declare bankruptcy and you’re out of the money entirely then. Some company may decided that it’s not worth the time, money, and risk to try to collect all those debts. So they will sell the debt to someone else who is willing to try to collect it (or in this case, just cancel it). Sometimes for a company it makes more sense to take a smaller guaranteed amount of money, then to bet on a risky higher payout.
Debts have been made a commodity that is being traded in financial markets between different institutions. The debts are valued after what they think they can extract from them. For example if you have a $1000 credit card debt a company might figure they can spend $200 in phone calls, letters, investigations, etc. and still only get you to pay $300 of your debt. So they value the credit card debt to $100 and will pay this to your credit card company or whoever owns the debt.
The debt that this church bought were likely older debts to mostly very poor people and might have included a lot of late fees and such which would be hard to collect on. In order to collect on any of this debt you would have to spend quite a lot of resources and still not get much money from it. So the estimates for the debt were very low. This allowed the church to buy the debt for cheap but still could claim to have canceled lots of big debts. You see these kinds of PR stunts all the time.
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