Recently heard of a church purchasing $3.3 million in resident debt for 15k and then cancelling all of it.
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Suppose I give you an IOU that says I owe whoever has it $1,000. In theory, that IOU should be worth $1,000 to you. But when you come to me and and try to get the money, I tell you that I haven’t got any money, and even if I did, I wouldn’t give it to you, so nya-nya-nya. If after several attempts to collect, I still appear to be both broke and uncooperative, you may by thinking that this IOU is in fact completely worthless. So if company came along and said “We will give you $100 for that IOU” you’d probably be pretty tempted to take it. $100 is better than nothing. Not only do you get at least SOME money, but now you can stop worrying about me, the hostile broke guy, who you are probably pretty sick of talking to.
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.
### 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.
Suppose I give you an IOU that says I owe whoever has it $1,000. In theory, that IOU should be worth $1,000 to you. But when you come to me and and try to get the money, I tell you that I haven’t got any money, and even if I did, I wouldn’t give it to you, so nya-nya-nya. If after several attempts to collect, I still appear to be both broke and uncooperative, you may by thinking that this IOU is in fact completely worthless. So if company came along and said “We will give you $100 for that IOU” you’d probably be pretty tempted to take it. $100 is better than nothing. Not only do you get at least SOME money, but now you can stop worrying about me, the hostile broke guy, who you are probably pretty sick of talking to.
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.
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.
Suppose I give you an IOU that says I owe whoever has it $1,000. In theory, that IOU should be worth $1,000 to you. But when you come to me and and try to get the money, I tell you that I haven’t got any money, and even if I did, I wouldn’t give it to you, so nya-nya-nya. If after several attempts to collect, I still appear to be both broke and uncooperative, you may by thinking that this IOU is in fact completely worthless. So if company came along and said “We will give you $100 for that IOU” you’d probably be pretty tempted to take it. $100 is better than nothing. Not only do you get at least SOME money, but now you can stop worrying about me, the hostile broke guy, who you are probably pretty sick of talking to.
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 $50 then saying the debtor doesn’t need to pay you is kinda cool, it gives the debtor peace of mind I guess. But on the other hand whoever sold you that debt was pretty sure they were never going to pay in the first place, and the first debt-holder already reported their failure to pay to the credit agencies so they already saw their credit score go down. All they really were saved from is being hounded by debt collectors.
This sometimes also works for private persons.
I helped out an elderly guy who was close to retirement and didn’t have much income. He had about 10.000€ of dept at his ( private) bank for a longer priod of time ( about 10 years) but never paid money back. Then we set up a letter that due to a friend, who would be willing to lend him 3000€, he would be able to forward the money to the bank when they’d be willing to cancel the balance of 7000€ otherwise he would declare bankrupcy and they wouldn’t get a penny ever. They accepted and he’s now dept free.
Banks calculate different from how private people do. Every time, the dept has to be handled ( accouting, writing letters, costs for lawyers etc), it costs them money. So they calculate for example” 10 more years of trying to get everything back is more expensive than take the fast buck and forget about the rest”.
And this is the same reason, why this business exists.
Who says what somethings worth. If I want to sell you a huge gold ring 1$ why should you be forced to say no? I might want to sell low for some reason (It’s the one ring and the ring wraiths are coming). In the case of debt although the debt is “worth” 3.3 million you are never going to get 3.3 million dollars. Lets say 100,000$ of that debt is owed by a 91 year old with stage 4 cancer with basically no assets. If you manage to get 0.05$ on that 100k you will be doing very well. More over it will probably cost you over 1000$ to get that 0.05$; you are going to need to go to probate court when they offs it and present your case. So that 100k is literally worthless. There might also be a very poor person with 200K in debt. You might be able to get them to pay back 2K. If you go for more they will declare bankruptcy and get all the debt discharged, then you get nothing. All the debt in this 3.3 million pool will be like this.
My guess is that of that 3.3 million about 3% or 99,000$ is actually recoverable, and recovering it will take a lot of time and money. The people who hold the debt now are not debt recover specialist and as such probably could not recover any money. Therefor they sell it to someone who is, so they get at lest the 15K. The debt collector then spends maybe another 50K collecting the 99K for 34K in profits.
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