Comment by patio11 | Hacker News Reader

Comment by patio11 | Hacker News Reader

There used to be a few companies which did decision-tree style disposal of debts via the FDCPA and FCRA, which basically involve sending letters according to a flow chart and hoping one's counterparty is not as well-organized as oneself on the same flow chart. They worked. Very, very well.

The credit agencies, without any legal rationale for doing so as far as I am aware, started to simply ignore letters which they believed were being generated in an automatic fashion. The decision tree is still the same -- it's the law! -- but to be effective at using it you have to phrase your request in a way which doesn't suggest that you are an expert at writing that request (unless you are a lawyer).

The chief objection to decision-trees-as-a-business-model seems to be that the credit dispute industry was crooked-as-a-barrel-of-fishhooks (welcome to consumer credit, hope you enjoy your stay) and successful in getting people to accept terms like "Pay me $2,000 and I will successfully get you off the hook of $8,000 in debt. Although not particularly relevant to you, this will require writing three letters and waiting a bit."

Hang on, if it's legal for them to ignore letters if they feel like it why would they ever accept a letter which causes them to lose money?

(Or is this just "consumer protection in the US does not work", again)

I think it's more that the letter only holds sway in the first place by the implied threat behind it. If the letter is from a bot, there is nothing to back up the threat.

Can't the bot account for this by stating that if there's no response, call your local attorney and bring them this summary of facts?

Sure, but then you're paying an attorney, not a bot.

This is why you must send the letters certified mail with return receipt. After 30 days, if the creditors do not comply, you "win"

Shouldn't competition take care of the $2,000?

I happen to know a little about this because my fund is short a publicly-traded company that buys up defaulted credit card debt and goes after the defaulters using shady practices, threatening letters etc. Competition does affect this figure. Back in 2008-09 when the usual competitors in this space didn't have the balance sheet to operate, the few who could buy defaulted debt were making 40-50% returns by effectively buying up debt that they expected to recover $2,000 from for $1,333 (I'm simplifying here because it takes several years to recover the money and there is a present value calculation to be done).

By contrast, fast-forward to last year and at best these companies will only make a 7 or 8% return, barely enough to cover their cost of capital. That return is lowered from the 50% return of the 08-09 era either by the companies bidding against each other and ultimately paying more than the $1,333 for the defaulted debt from the original issuer, or by accepting less than the $2,000 for settling with the debtor. It will not go to zero however - the lower limit is the cost of capital of the companies that buy this debt up.

There is some good news in this space - recent U.S. legislation has targeted some of the shady practices used by these companies (which is one of the reasons we're short the publicly-traded company).

Very interesting. Thanks!

In the long run shouldn't recovering more money from defaulted creditors lower interest rates for people before they default?

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