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This page contains a single entry from the blog posted on November 11, 2012 10:30 PM. The previous post in this blog was Chilly 'dogs chosen. The next post in this blog is Freaky NFL tie sends fans to calculators. Many more can be found on the main index page or by looking through the archives.

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Sunday, November 11, 2012

A different kind of bailout

Here's an interesting way to help people in default on their debts -- if you're inclined to do such a thing. Step 1: Take up a collection. Step 2: No, don't give the debtor the money they need to pay the debt off. Go the lender instead, and offer them pennies on the dollar, which is all the insolvent person's debt is worth, anyway. Step 3: After the lender sells you the debt at steep discount, forgive it in full. This way the bankers get what they deserve, and the borrower is off the hook.

Comments (12)

Seems like this works because these folks created an organization with the (minimal ?) skill needed to find and buy debt. Smart.

Um, Prof. Bogdanski, except for the borrower owing taxes on the amount of the forgiven debt?

Possibly. But most forgiven debt does not result in taxable income. There are exclusions for insolvency, bankruptcy, many home mortgages, farms, and several other situations.

Some things I think about right off the bat.

1. Banks get wind of the organization and up the price of the debt. Seems highly likely.

2. I wonder how much my student debt is worth...actually I know how much ($0, less even), but I wonder what they might sell it for.

3. Many of these people just need to bankrupt and restart. I'm in that boat myself. It what circumstances would this program help where bankruptcy would not? I guess it looks better on your credit report?

A market solution no less. Looks good to me, so long as it is private and voluntary. Be aware that if buyout demand builds the cost of buyouts will creep up.

They reject the notion there is any moral obligation to pay back money borrowed. It has become quite obvious the Occupy folks reject most issues of morality.

I agree with JO. Housing prices will never stabilize until the market is through digesting the debt. I saw many people use their homes for piggy banks in order to go on trips or buy nice things. Granted, most probably put their kids through school or helped granny pay for a nursing home, but when you sign a mortgage debt agreement, you understand what is at stake and take that risk. Pay or lose the house.

I am not sure where paople got the idea that banks are unfair for wanting to collect a debt where that they paid out and now want to be paid back. There was a lot of fraud and just plain hucksterism going on, and while these loans are tainted, the vast majority required people to use their brains before pledging their biggest asset as collateral on a loan. If people are bailed out, the lesson is not learned by the individual or society. The lesson becomes, get in financial trouble, cry a bunch, and get someone else to bail you out. Plus -- people value more that which they pay for. They become more independent and stronger in the process. Yeah, tough love is tough. Families deal with it all the time.

It what circumstances would this program help where bankruptcy would not?

You can't use bankruptcy to discharge student loans, so isn't that such a circumstance?

The lesson becomes, get in financial trouble, cry a bunch, and get someone else to bail you out.

All the crocodile tears for the poor, poor banks! My tax dollars were used to bail them out, which was then used to pay out massive bonuses to those who screwed the pooch in the first place. I guess "lessons" are only for the peons.

bartender - Since you cannot (with narrow exception) discharge student debt, that debt will not be sold for pennies on the dollar. So no this wouldn't work with student debt. They are targeting medical, which is the big one statistically.

Gibby - The moral obligation to pay back money borrowed is only a small part of all of this. They are helping people get out of medical debt, not people who ran up their credit cards on booze and women. Perhaps you are saying people have a moral obligation not to get sick, and if they do they have a moral obligation to just stay home and suffer/die instead of getting care?

I've read some silly things from you, but your bubble cannot be that opaque.

Wackjobs tend to bring the moral obligation while ignoring the fact that most people are in debt through no fault of their own. They also misunderstand the value of bankruptcy to a vibrant 'take a risk' economy.

The process is also misunderstood. If you have the ability to pay you pay, if you don't then you aren't forced into a life of servitude to your debts. Which leads into another thing ignored, which is the role debt plays in involuntary servitude and slavery.

Further ignored is the lengths to which the big debt holders use the essential goodness of the debtors against them to make their lives miserable. They don't play by the same rules, at all.

At one point in our history it was the money lenders that were seen to be immoral ones, not it's the debtors. Systemically the issue with bankruptcy has very little to do with the behavior of borrowers but everything to do with the behavior of the lenders. Yet if you boil things down to a 1 to 1 analysis you might (incorrectly) but blame on the 'immoral' individual. That would be a mistake.

Boil this issue down to a 1 to 1 analysis leads to a misleading conclusion. The right likes to do that, but this is a systemic issue, a business and economic issue. Economic losers shouldn't have to be losers forever. I find that notion to be far more immoral.

I think you're wrong Jo. My student loan was discharged, but not before it was sold to a credit collection agency. Also see this (emphasis mine), from http://www.commondreams.org/headline/2012/11/12-6:

The Occupy offshoot, Strike Debt, will hold a telethon and variety show called "The People's Bailout" in New York on Nov. 15 to raise money for the cause. For pennies on the dollar ($32 for every $1), individuals or companies can buy distressed debt—including student loans and outstanding medical bills—from lenders if the borrower is either behind their payments or in default.

Good call EX. I was totally incorrect. Read too quickly I guess.

On a personal note, did you get it discharged under the undue hardship clause in the bankruptcy code? Or did you get one of the 10 or 25 year discharges? Or did you bankrupt private student debt under the old pre October, 2005 bankruptcy code?

One major issue with that change is that it applied to bankruptcies after that date, not NEW DEBT after that date. So people took out private student loans, with their parents cosigning, only to have it turn into non-dischargeable debt midstream.

Bankrupting of student debt is so rare that student debt is of greater value to debt collectors. Or am I incorrect on that as well? Crap now I'm second guessing...:-)

Also, if you get one of the 10 or 25 year forgiveness methods doesn't the federal government still back it and pay the bank? Or are the banks now totally out of that game? I think they are.

I am assuming your student debt was of the federal student loan variety.

Man...what a complex issue. Morality, shifting rules, tons of hearsay and misinformation. Politics. Grah!


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