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But the OP suggests the debtor gets first refusal.

What I don't get is why, if the lender is going to sell the debt for less that the debt its self, the lender cant offer to settle with the debtor for that amount.

The problem is a social one and motivation to settle in full.

> cant offer to settle with the debtor for that amount.

They very frequently do. Usually for 1/2 the original amount.

If they do it too often people will deliberately not pay their bills in the hopes of getting an offer.

>If they do it too often people will deliberately not pay their bills

Perhaps not, if it resulted in a credit ding.

Actually usually it doesn't. They'll say as an incentive to pay it that it won't go on your credit report.

You can only report past due payments, and outstanding debt. But if you take the offer the debt is not past due. And most non-credit agencies (i.e. those without a regular payment schedule) never report past due in the first place (only unpaid).

I am suggesting that in the new system, a credit ding would come along with the debt reduction.

In fact, elsewhere on this thread, I suggested that perhaps the size of the ding would be proportional to the size of the debt reduction. This gives the debtor more incentive to pay as much as possible.

Well, think about it from the lender's position. They can settle with you for $1,000, or they can sell the debt to a collector for $1,500. Which would you do?

You didn't understand the scenario. If they're going to sell to the collector for $1500 the why shouldn't the borrower have the chance to pay the same $1500 first?

The situations are not the same - the mere existance of such right of first refusal changes the value of this loan.

The price is mostly determined by information asymmetry - you don't know which debtors will be 'dry' and which will pay, but you can buy/sell a bundle of them and assume some average rate. If the sale was burdened with the right of first refusal (on a loan-per-loan basis) to a debtor who has much better knowledge on how much he can pay, then the deal is broken - collectors would be stuck with all the value-below-price loans while the value-above-price loans would get away for the listed price.

Also, it changes the value of your loan pre-sale - if my policies, in effect, tell you "well, you'll have a chance to get away with paying x% of the loan" then you won't pay more than x%, ever. If my policies tell you "I'll sell your loan for x%, but in that case you'll get screwed and pay 2*x% to the collector", then I have a reasonable chance to get more money than x% out of you before the sale.

It's quite likely that a policy "pay $1500 or I'll sell your loan to someone for $1000 who'll harass you until you pay much more than $1500" is rational and economically effective even though theoretically you're leaving $500 on the table; since it affects your decisions on when/if/how much to pay.

I think you have to factor in the threat of a credit ding. If the debtor knew that reductions would result in a lower credit score (and perhaps the degree of the credit penalty would be a function of the debt reduction percentage), then you can bring some parity back into the scenario.

I am also not sure how debt is currently priced. But, it would seem that current credit score and other metrics might go into the pricing, such that there is more of an actuarial approach. In this case, the price wouldn't be driven as much by information assymetry.

So, combine a lender who is more informed about how much debtors can pay with debtors who have incentive to pay as much as possible to protect their credit, then add the fact that you're throwing out the middlemen (debt collectors). It might be a win-win for the creditor/debtor, with only the debt buyers losing.

No, "credit ding" is not a factor here - we're discussing situations where you're already defaulting and it should be already marked on your credit. No matter if you're paying x% of the loan to the original lender or y% of the loan to the loan collector - you're still someone who can't/won't repay a loan (not just some tardiness in payments, but a default) and thus shouldn't get any loans in future.

If you're still just delaying and are willing to pay near-100% of the principal - then you might get some deal where "protect your credit" is a factor, but these aren't the sort of pennies-on-dollar deals the original article talks about.

Maybe I'm phrasing what you meant with your third sentence, but one reason the banks would have losses is that 2ct per dollar is only the average and those that could actually pay those 2ct are worth more then those 2ct.

Simple example: 100 people overall, each having a 100000 dollar debt; 20 of them will not be able to pay back anything, 20 are able to pay back 1 ct per dollar, 20 are able to pay back 2 ct per dollar, 40 are able to pay back 3.5 ct per dollar. Those 40 on top will now, too, only pay back 2 ct per dollar and the bank loses 1.5 ct per dollar on them, resulting in 100000 * 40 * 1.5ct = 60000 dollar losses.

Personally I'd like that solution anyway, because it would help to even out the unfair distribution of wealth.

The problem is that it will ultimately lead to the market value for debt to drop even further.

- Lender "A" is owed $20,000 by each of 2 people.

- Debt buyer "B" offers to buy them for $1,000 each.

- Debtor "C" realises that getting out of her own debt for 5c in the $ is a good outcome, and take up the opportunity to buy the debt herself. "A" gets their $1000

- Debtor "D" realises the same thing, but he has no way to pay even $1000 for the debt, so passes up the opportunity to buy the debt.

- "B" ends up buying D's debt for $1000, even though it's now obvious that D has little change of ever paying it back.

B ends up with debt that they can never recover - not even the purchase cost. This leads to B offering less money for this style of debt next time.

The only reason B was willing to pay 5c in the $ on the original debt is because that aligns with their odds of getting the debt repayed.

Once you create a system which filters out the debts of anyone who has the ability to pay back a chunk of their debt, the debts that end up selling to the agencies are the real rubbish loans that will never get paid back.

Well, it seems the primary harm would come to debt collectors who wouldn't be able to buy enough "good" bad debt.

On the other end, no one wants to deal with debt collectors, so it seems that they do provide a disincentive to defaulting. Still, the primary stick they have is the threat of a credit ding, which is there even without the debt collectors. And, with enough such dings, the borrower would no longer be able to obtain credit and perpetually abuse the system/drive debt prices down.

So, in this scenario, the market value for debt would seem more a function of the quality of the borrower in the first place. I generally don't think most people want to default and get dinged for it.

So, it seems that the biggest consequence is debt buyers going out of business. I don't know. I'm starting to have trouble seeing the real downside here!

The market for purchasing debt securities on the cheap is factored into the cost of the debt. So if debt purchasers go out of debt, the interest rates for borrowers, both good and bad, go up.

Alternatively lenders could just be more responsible by not lending to those who can't afford to pay it back.

Easier said than done.

Also, this thread was originally prompted by the idea that it would be good for borrowers if they could get a right of first refusal on any resale of their debt. There's a question of whether more selective lending is in the best interests of such borrowers.

As much as being in debt sucks, many of these borrowers would prefer to be in debt than not have had access to borrowed money in the first place. Moreover, this would make life harder certain borrowers who would pay back their debt but can't get a loan because they fall within whatever statistical grouping or heuristic lenders are using to minimize their losses.

>There's a question of whether more selective lending is in the best interests of such borrowers.

It's kind of odd to question whether it's in the best interest of borrowers. I mean, we're talking about the people who clearly cannot pay their debt and thus need it reduced. So, more selective lending would disqualify them and prevent them from getting in over their heads again.

>many of these borrowers would prefer to be in debt than not have had access to borrowed money in the first place.

Again, that's odd. We're not just talking about being OK with debt. We're talking about being so far in debt that they cannot pay. Why should they continue to have easy access to borrowed money? Their preferences aside, that doesn't really work for anyone under any system (including the current).

>this would make life harder certain borrowers who would pay back their debt but can't get a loan because they fall within whatever statistical grouping or heuristic lenders are using to minimize their losses.

That's purely hypothetical.

The only case that this makes sense for is the case of people borrowing money to access medical services (as per the original article). Though people shouldn't have to get into debt that they have no hope of repaying to access medical services. That's a problem with the health system, not something that fall under the debt market. Ultimately it seems that if you don't pay for health services through taxes, then you pay for it through other means (e.g. paying higher interest rates to the banks when you take out a loan to buy your house)

It's a one way market where the purchasers are replaced (from the debt collectors to the actual owners)

Before: I owe $20k, the bank sells my loan to a debt collector for $1k. He expects to collect 10%, ends up extracting $2k from you. $1k for the bank, $1k for the loan collector, -$2k for you.

After: I owe $20k, the bank wants to get rid of my loan for $1k. I buy it (because my grandma just died and I had the cash) . Bank and I are better off, loan collector gets nothing.

OR bank tries to get rid of the loan, trues to sell it to me for $1k, if that doesn't work they go to the loan collectors. Loan collector buys it, and works out a more fluid payment scheme to try and get back $2k very slowly from me.

If the loan collector can't offer a better service, I don't see their value to society anyways. Apart from subsidizing loans for people by being willing to be the guy who psychologically tortures people in bad situations (who most likely don't know about debt collection laws in place to stop this). In the end we kill off a disgusting system.

> So in theory, if you can pay $1,000 to buy your own debt, somebody else should be willing to bid at least $1,001.

Not at all true. Suppose I have, for instance, a debt dischargeable in bankruptcy, which has a current balance of $10,000, and $1,000 in assets. I might be able to pay $1,000 to purchase and settle the debt, but I'd have very little reason to pay $1,000 on the debt without it being a full settlement, and there's pretty much no reason for any third party to be willing to pay $1,001 (or any value not substantially less than $1,000) to purchase the debt.

That's why I qualify all of this with a legal system that is able to seize the assets of debtors when needed. In that case, it doesn't matter whether you want to pay $1,000 or not, you will be made to.

> That's why I qualify all of this with a legal system that is able to seize the assets of debtors when needed. In that case, it doesn't matter whether you want to pay $1,000 or not, you will be made to.

Sure, if you have a legal system that has zero cost, zero risk of not getting the outcome you expect, takes zero time to operate, doesn't include bankruptcy or other avenues of discharging debt, and debtors never have multiple competing claims on their assets that are not part of the same package being sold... if all that is true, then the amount a third-party purchaser should be willing to pay for debt should generally be the lesser of the face value or the total of the debtor's assets.

However, those assumptions bear basically no resemblance to any set of conditions that applies in the real world, so its all meaningless.

It's nice of you to reiterate everything I covered in my original comment, but I'm having trouble seeing the point....

Keep in mind that if I can settle a debt for $1000 I may very well be able to lend money from friends or family to do so, whereas I'd likely be unwilling to do that if I would face certain bankruptcy regardless.

There are many situations where a person may not have any seizable assets, but still have the ability to raise cash to cover a firm offer to settle a debt.

Well, you maybe willing to pay $1000 to settle the debt when the nice lady from the bank called you, but chances are you will be willing to pay more if a debt collector shows up at your door.

But then there's the difference between capacity to pay and willingness to pay.

If I had this huge debt, I might be willing to borrow a little from friends to get rid of it, so I might only have $800 (+$200 from friend). The creditor realises I can pay $1000, so tries to sell it for $1500. Suddenly I'm stuck again.

Also, it could turn out that I could pay $1000, but I won't. There's also a collection cost (hire a guy at minimum wage to stand outside the guy's house for a day costs something).So the $1000 might end up not being worth anything at all.

It is implied that the purchaser would be a third-party with the ultimate intention of waiving whatever debts that a traditional debt collector would pursue.

No, that is not what OP implied at all. "For example, I owe a credit card company $20k"