There have been journalists & researchers who covered these debt collectors at court. When defendants showed up, organised, they usually won.
The debt collectors' lawyers didn't arrive prepared to win, because most people didn't show up. If you can win 85% of cases just by showing up, why bother.
A court system that allows these dynamics to dominate isn't serving well.
In little people law, such as, debt collection, landlord tenant, family law, some bankruptcy/creditor issues, it usually doesn't take much effort to disrupt the volume practitioners.
The volume-based attorneys often exclusively practice in one area and rarely face an attorney. The few times I defended people, it really threw a monkey wrench into the process.
Unfortunately, there is no money in being a white knight in most areas of little people law.
Not if you must have a lawyer admitted to the State Bar with a three year JD to pay off. Paralegals can do 99% of the work and have a lawyer review it, sign off on it and be liable for documentation but everything but a lawyer or representing yourself in court is illegal in the US.
No bicycles, motor bikes or Hondas. If you can’t afford a Mercedes you can walk.
Useful in some situations, but generally limited by consumer contracts and because people with damages arising out of different circumstances are hard to group into a class.
And it only gets to court after harassment hasn't worked. Anecdata: guy I know had a common name. Debt collector fastened on him because he'd lived in the same town as a deadbeat with that name too. Guy would call day and night demanding payment.
We were on the receiving end of that when the debtor in question registered our phone number when she signed up for a CVS card. It took awhile to figure it out, but every time we picked up something there, we would get increasingly crazy calls from debt collectors and insurance subrogation people.
It got worse over time as the collection agencies sell bad debts at a discount, and the bottom feeders when the debt is close to aging out are awful.
Is it necessary to call someone with debt a “deadbeat”? Often the people who are being hounded by debt collectors are victims of predatory lending and a system designed to punish them with fees for being poor.
Not precisely "certified mail," but just "mail." They can choose to use certified mail if they want, but it's not required. You should always use certified mail to communicate with a debt collector, no matter if the debt is legitimate or not.
I have done that twice for family members, along with asking for proof of the debt, and that they are authorized to collect it. Both times, never, ever heard from the collector again.
My understanding with debt collectors, is that they usually purchase a spreadsheet with very limited data, and there is almost never a paper trail for said debt. Which also means debt has a habit of showing up on multiple spreadsheets that keep getting resold. I think planet money did a podcast on this topic.
This seems to the the correct understanding. See these two articles that give the view from people who tracked down the debt collections and the bad data in those spreadsheets.
Why would a person who legitimately owes a debt win just by showing up?
I had a small unsecured debt that was put into collections and then I was served an order of execution by the marshal to appear in court. I went to court and the judge made me sit down with the debt collectors lawyer and a mediator and we worked out a repayment plan at about 60% of the original balance.
I really don't understand what "win" means in this context besides avoiding a default judgment.
> Why would a person who legitimately owes a debt win just by showing up?
Debt collectors often don’t play by the rules, or don’t keep good records that are required to legally collect the debt. Even if they do, it’s not like the lawyers are likely to spend time tracking down the info for a single case to prove it.
“Win” means the debt is found invalid due to one of these reasons.
As I mentioned I have been to court for a debt collection.
Before you go to court the debt collector has to send you proof they served you papers for your debt. They have to send you proof of the chain of debt from the original creditor on down. For a $3,000 debt I was sent a packet of at least 80 pages with tabbed chapters and detailed photos confirming service before I had to go to court. I did not request this information, they were required by law to send it to me.
These are not optional. These records are necessary to get a judgement.
Debtors ARE at a disadvantage in the courts if they do not have the money for a lawyer to fight or they don't have the time to show up on their own. This is an injustice. But saying that debt collection is being illegally enforced in the courts I believe is just untrue. If you do not owe a debt and contest it in court you prevail. But if you do owe a debt and through neglect or ignorance you end up with a default judgment or negative consequences that is on you.
Exactly the point. To win, they need to cross all the Ts you mention. OTOH, they can also win if the defendant no-shows.
At the bottom end of the debt collection pool, one strategy is to buy debt with a high chance of no-show and win cases that way... no need for meticulous and expensive lawyering. If people aren't answering their phones or opening any official looking mail...
It's not the only strategy, but it is one.
I think it's a mistake to look at these things too moralistically though. At an individual case level, maybe you're right. It is on you.
What we're looking at here though is an industry. It is built on knowledge about how certain people behave under stress of debt and exploits it. It's also dirty all the way down. Mostly, by the time these go to court the debt has been resold multiple times at small fractions of face value. Crazy interest has been applied.
Economically, it is really going for the last drop. Companies selling off bad debt... it's a pretty marginal income. On the other side, these collection agency debts basically eject a decent portion of the population from good standing in society. It's harmful, and it is happening in a court.
Scale, circumstance... when it gets this big we need to look at it systemically.
In order to have a default judgment against a person they must be served (aware of the situation). If you're being told "show up to court or face a negative outcome" and you do nothing then whose fault is that?
You took on the debt. You decided not to show up in court. Are debtors just never accountable for their actions?
Also to quote a comment by a lawyer in this thread
>I am licensed in California and Texas, and in both states one must "prove-up" a default before judgment is entered by presenting a "prima facie" case. In other words, you must prove your case before a judgment is entered, even if the defendant does not show up.
So in some circumstances even if you don't show up the debt collector must fight to get a judgment as if you were there. I really suggest you look into the resources available to low income debtors in most states. In my state there are entire systems set up to support people who feel beset by debt collections.
> You took on the debt. You decided not to show up in court. Are debtors just never accountable for their actions?
And what happens when that debt is $117 from Comcast because you "didn't return their cable modem" and they lost a class-action lawsuit about this?
Did I document that I returned their cable modem 4 years earlier because I used my own? Probably. Did I bother keeping that record for 4 years after it didn't appear on any of my bills? No.
So, when I moved and I didn't have a cable modem to return and they charged me for it and then turned it over to debt collectors (and magically never notified me before it went to debt), I wound up with a stupid-ass $117 judgement that I'm going to have to hire a lawyer for, force Comcast to disgorge 4 years of records, and put it on a docket.
And then Comcast will finally not show up and I'll win. After spending WAY more that $117 of resource and time.
Or I can ignore it for 3 years and file to drop it with the credit agencies and then they'll get rid of it.
People default all the time because they don't really appreciate what can happen if they ignore a court summons.
And, often people mistakenly rely on the advice of friends or family who suggest the debtor wasn't served properly, the debt is too old, they spelled your middle name wrong, or whatever.
There are tons of legal myths out there, such as, non-competes can't be enforced, it takes months to evict someone, I can pay my rent after the three-day pay or vacate date passes, or the like.
Also, in my experience people unfamiliar with law seem to be susceptible to spinning a story in their head that they think will exonerate them only to find out too late that their imagination doesn't carry much weight in court.
Oh, that's all you meant. I thought it was always mentioned under the context of it being unenforceable in a particular state, so that's what I was confused. Didn't even realize there are people who thought they're unenforceable everywhere!
What if you don't owe the debt, however you are hit with dozens of summons to show up to different courts for different supposed debts? How is it fair to force a totally innocent person to take time off of work, possibly hire a lawyer, in order to not have a default judgement against them from a shady debt collector?
Sure that aspect of debt collection can be improved and is a clear injustice. How many debt collections are of that nature vs people with real lapsed unsecured debt though? If i had to guess not nearly as many.
I'm mostly taking issue with people who are threatened with a default judgment for a real debt but pretend it isn't happening and then turn around and cry abuse by the system.
To be fair, it's completely legitimate to issue debt that the original lender can sell for liquidity, although it should probably be difficult or impossible for institutional lenders (eg credit card or mortgage) to originate those. The real problem is the combination of interest and inablity to default onto some concrete piece of collateral, which in the creditor-preferred case of making incremental payments without net reduction in the principle, amounts to fractional ownership (like owning stock in a corporation) of a person, ie slavery.
Why would selling debt make you morally not responsible for it? My mortgage has been sold multiple times. IMO, I still 100% have a moral (and obviously legal) obligation to pay it.
Unlike secured loans like mortgages, the cost of default for unsecured loans is already priced in to the interest rate of the debt. Once it gets sold a third party, that's just a bet by that company that they can strong arm you into paying them something above what they paid for it by exploiting your anxiety or misplaced sense of duty. They didn't earn anything -- they didn't create a service or good that you found valuable, didn't invent something that saves you time, didn't make you life easier or more comfortable. They are scavengers. There is no moral obligation to enrich scavengers.
> Unlike secured loans like mortgages, the cost of default for unsecured loans is already priced in to the interest rate of the debt.
That cost likely also takes into account the money they can get for selling the debt of defaulters. Otherwise the bank down the street that does this more accurate calculation would be able to undercut them by offering a lower rate and take all their business. There's no free lunches.
The existence of a secondary market for debt affects the price of primary issuance of debt (in a way that benefits borrowers).
Your argument could be applied equally to say that anyone who buys a share of stock in the open market (not during an IPO or secondary offering) hasn't actually made an investment in the company because the company didn't get those exact dollars.
Rules vary from state to state, and even court to court. It sounds like your experience happened in a jurisdiction with rules that are unusually protective of debtors' rights. Maybe this was New York City?
The vast majority of jurisdictions do not require creditors to provide this information in most cases.
NYC's rules came into place within the last decade, after patterns of serious abuses by creditors.
Most defendants don't know anything about the case. They've been avoiding collection calls for years as agencies sell and resell their debt. Piles of unopened mail, etc.
For their part, the agencies tend towards sloppiness. Some debt sells at <5% of face value, and comes with virtually no information or documentation.
Thinking about this is a matter of justice is ridiculous. It's not a justice driven process, it's an economics driven process. The agencies do this as their business. They work repetitively, create a process and pursue cases as long as average revenue exceeds average court costs. If a defendant shows up and wins, it's a small cost. Most defendants don't show up, so they don't bother spending legal time making cases good.
And yes, it is the courts responsibility to put a stop to it. For one thing, resolving debt humanely (or not) has been a court function since ancient times and still is. Secondly, debt collectors have basically turned these courts into their own shady place of business. It reflects badly on the court, besides clogging it.
>They've been avoiding collection calls for years as agencies sell and resell their debt. Piles of unopened mail, etc.
OK but with the exception of fraud and incorrect identity then the rest of the people have a real original debt right? The debt might be sold at a fraction of it's original amount but that's because the debt collector takes a risk to put in time and legwork in exchange for collecting a real legal debt.
I am against exploitative debt fees/interest and I realize the debt collection world is full of shady figures but the narrative of the debtor as victim is a bit oversold.
No it isn't. Many people become debtors because they have no choice.
If the choice is between clocking up an insane credit card bill at astronomical rates or not having your family thrown out onto the street for another month or two because maybe your job search will finally pay off, what would most people pick?
Some people get into debt because they can't manage money. A lot of people get into debt either because they're not paid enough, or they're not paid regularly enough. or the economy fell apart around them for reasons that are nothing to do with them.
And anyone who freelances will tell you stories of clients who refuse to pay for 3-6-9-12 months past due. (Yes, you can always find better clients - if you have enough of a lead time.)
Debtors are debtors because they're at the bottom of the power pile. Many aren't "guilty" of anything except getting screwed over by a business culture which is driven entirely by inhumane feral greed.
> the rest of the people have a [legitimate] original debt right?
> the narrative of the debtor as victim is a bit oversold.
When in fact the narrative of the debtor as victim is significantly undersold, and many (I suspect, but won't assert, most) original debts were incurred due to usurious and predatory lending.
I wouldn't argue that debt collection enforcement is outright unethical in general, but their cases tend to very flimsy, and if people realize they can easily knock them down... good for them.
Don't sign the contract and take on the debt if you can't pay it.
If the contracts are usurious and predatory then they probably will not stand up in court if challenged. Most collection agencies settle for 50-70% of the balance of a debt without question anyway.
Debt collectors have to provide proof that you know about your debts and that they are legitimate in order to enforce collection of them. If they can't do that then there is no judgment.
> You're moving the goal posts on me. I'm talking about debt collection enforcement not the morality or circumstances of why people take on debt.
Not all people chose to take on debt. From the linked article:
> Medical debt can be particularly devastating and accounts for more than half of all collections activity.
I don't think we can realistically characterize medical debt as a choice for most individuals. If someone is ill and and has medical debt, is it right to issue a default judgement against them for that debt? What if their illness is the reason why they couldn't show up to court in the first place?
Fraud in debt collection is rampant. Yes, there are legitimate debtors, but you can't assume than some one who is being sued legitimately owes the debt. Even without fraud, many debt collectors illegally harass the debtors, knowing they can't afford a lawyer to defend themselves.
AFAIK harassment in most states is very illegal now and is a great way to get your debt dismissed.
The same goes for fraud in debt collection. As I mentioned in previous comments, tactics like sewer service by debt collectors are a great way to get your debt dismissed.
Many people with lapsed unsecured debt know they owe that money, they simply prefer to pretend the debt will go away if they ignore it. If they don't know they owe the money then they definitely know they're being sued because in court they can't get a judgment against you without you knowing about it. On top of that many states require the debt collector to prove you owe the money even if you completely neglect engage with the system at all.
Harassment and fraud is illegal, but people do illegal things all the time.
"court they can't get a judgment against you without you knowing about it"
... in theory, but in practice there are several ways to "serve notice" that don't involve the other party actually receiving the notice. Sure, if you can hire an attorney you may be able to get the default judgement overturned if you find out about it later, but again, it isn't all roses.
I'm not an expert on every states laws, but I don't think that the standard of proof for an uncontested claim isn't particularly high in most jurisdictions.
And to add to this, if a debtor doesn't get served (let's say that they took some bad advice from a friend and decided to dodge the constable trying to serve them in the hopes that "since I wasn't served, I can't be sued" is accurate), the constable will notify the attorney that contracted them to serve papers, saying that they couldn't serve them in person. At that point, the attorney sends a certified summons to the debtor's last known address and is then allowed to go to the court clerk and say that they've tried their best x number of times but the debtor can't be reached. They will enter their certified proof of mail into the record and the case will be tried on the scheduled date regardless, resulting in a default judgment when the debtor doesn't show up. Once that happens, if the debtor is employed (and even depending on the type of debt), they'll get a nasty surprise when their employer notifies them that their wages are being garnished and that there's no longer anything they can do.
I mean, I've been harassed by years for a debt that doesn't even belong to me, but rather to the person who previously had my phone number. Over the years I have learned their name, address, name of one of their family members, amount of the debt, and who the debt was originally owed to (a local government agency no less). The debt collectors shouldn't have disclosed any of this to me but they did, unprompted, often in voice mail. Mailed threats have been unsuccessful in stopping the calls, as when I send a nastygram to one collector they seem to just sell the debt on to another.
I guess my point is that the legal protections against harassment do exist but are not effective. It's not even my debt and I have a master's degree and generous income and I ended up changing my phone number in order to stop multiple calls per day. So to whoever ends up getting that number assigned, sorry about Esteban's $8k in back tuition and good luck.
The irony is that my new phone number also gets calls from debt collectors, but far less often. It seems the debt was either smaller or sold into a less predatory corner of the industry.
Yeah ok. I think you will keep scapegoating these other ‘evil’ ‘no-defence‘ people, until you yourself are on the receiving end of systemic inequity - or systemic failure - at some point and that’s when the penny will drop...
It's pretty fundamental in our society that the court looks at the arguments presented before it. If the claimants make a reasonable case and you have nothing to say about it as the defendant then the court will act on that. The idea is that it stops people coming into the court prejudiced.
This isn't a case where a guy didn't pay his builder and then no-shows at court.
These are debts sold at >10% of face, often smallish debts that have accrued massive interest. Some agencies specialise in persistent calling. Some specialise in deal-making. Some specialise in legal proceedings. These are the ones we are talking about.
To work, they need to keep legal costs low. They often don't bother to have a case, because they're happy to win just the no shows. That's the formula. Buy 100 notes. Take them to court. 80 or so will no show. You can then try to seize the their assets. The whole thing is premised on the fact that these defendants don't open their mail. Either side making a case to a judge is rare.
It's a misuse of the legal system, and the court shouldn't allow it.
Most states now have laws against debt collection harassment and have caps on debt collection interest and fees.
There has to be proof in court that a debtor was served papers to get a judgment. There's a term called 'sewer service' where some shady collectors try to fake this service. If you get lucky your debt collector might try this on you, it's a great way to get debt wiped clean by a very angry judge.
unless the debtor has the cash ready to pay, most debtors never, ever respond (and shouldn't) to any actions to collect debt by a third-party collector, so that there is no chance at the even tiniest appearance of acknowledgement.
often, even if you have the intent to pay the debt, paying to any agency other than the originator of the debt is risky. debt collectors roll over debt en masse to keep them legally fresh and will not honor any promises that haven't been duly signed and served.
Contact from a third party collector? Sure, don't respond. But if you're being summoned by the court under threat of a default judgment then you should probably show up or don't be surprised about the outcome.
> It's a misuse of the legal system, and the court shouldn't allow it.
I really don't see how.
They file a case. They present an argument. The other side doesn't. What should the court do? Keep asking the other side to bother to show up? If they did that you could block any claim forever by just not showing up. That's not justice.
Our whole society's legal basis is 'show up and present your case and have it judged'. It's called the 'adversarial system' - look it up.
If it's a genuine debt, and it sounds like it is, then either pay up or argue your case in court.
I'm not thinking about this as an individual case, or debating an individual case.
I'm talking about a business model whereby an agency systematically buys "no show debt" at a tiny fraction of face and mass produces personal bankruptcy. As the article shows. This business model (subsidised by the state, which provides the court), in 2020, is civil law.
That business model is not something the courts should play ball with. Lawyers and judges will stay within the legal rules.
In any case, I think there needs to be a debt regulator...
You can't address the business model if you can't explain how you would change how an individual case plays out.
The standard of evidence in civil court is "the preponderance of the evidence". Would you propose changing that standard, so that a debt collector's unchallenged word isn't good enough to prove their case? What exactly do you propose to do about the fact that most people default?
Should we make participation in civil cases mandatory and issue bench warrant when defendants fail to appear? Should we reduce how much income can be garnished so that garnishment is effectively useless? Should we require that every update in the case be personally served by a process server?
The business model would collapse overnight if debtors began challenging creditor plaintiffs en masse. I don't see how the failure of a defendant who has been properly served to defend their case reflects a systematic failure on the part of the courts or the law.
I took a company to small claims court about 10 years ago. In my state at that time, the max you could sue for was a few thousand dollars (now it's $7k, https://www.mass.gov/service-details/small-claims-court). It was run by a magistrate, not a judge, and AFAIK no ordinary citizens who had brought cases (including myself) had a lawyer to represent us. No surprise there ... the small claims courts are designed to work this way, so ordinary people can bring cases if relatively small sums are involved.
Most of the defendants (which were small or large companies, some local and some national) in these citizen-brought cases didn't even show, but those who did typically brought a lawyer to deny the charges, and were usually asked by the magistrate to work out a settlement in the hallway.
Excluding the local small claims plaintiffs such as myself, about half the docket consisted of national credit card companies suing local debtors. The lawyer for say BOA would come in with a list of 10 local people being sued for amounts under the small claims threshhold. Maybe 1 in 4 defendants in these cases did show up, and were asked to work out a settlement in the hallway. If the local person being sued didn't show, the default judgement was for the credit card company with treble damages, putting these people further in the hole.
Many debt collection cases will disappear if the alleged debtor files an answer (in court) to a debt collection complaint.
Filing answers is relatively simple and doesn't cost anything.
Depending on the jurisdiction, filing an answer basically puts the brakes on the case because it is not worth it for the debt collector to pursue it any further. Their business model is based on default judgments.
Eventually, after a year or so, if no action has been taken, the court is likely to dismiss the case (or you can ask them to).
Also, debt collection law has a lot of federal consumer protections and often more protections at the state level. Thus, it is not uncommon to run into debt collectors that are violating fed or state laws. Raising such issues also makes the case go away.
Of course, your mileage may vary depending on local laws and the nature of the debt or contract breach. But when I practiced little people law (before I sold out and went into IP law) I did this a few times and it worked without issue.
Thinking about it now, I guess a debtor-side lawyer should be involved, but defending such cases require hardly any effort on the part of the lawyer, so again I wonder why there are not debt relief orgs doing this. I believe fighting back just a little would significantly reduce the predatory practices of the volume debt collectors.
I imagine debt relief agencies don't fight because I think many are funded by the credit industry. So they direct debtors into payment plans rather than trying to shut down the predators.
> I imagine debt relief agencies don't fight because I think many are funded by the credit industry. So they direct debtors into payment plans rather than trying to shut down the predators.
Or they require money up front to help you. They already know you are (likely) a default risk, so “cash in advance, please”. And as you allude to, a lot of times the “real” value in services like this is relief from the stress of the calls and letters. They’re not passionately involved or connected, they just have the calls directed to them and put up with it and give you a settlement offer that you could have reached in the first place.
The single largest thing we can do is undo the changes to bankruptcy law signed in 2005, it removed bankruptcy as a tool of the poor to discharge excess debt. It's caused there to be very little downside to lending, and lead to an explosion of debt.
I'm begging on hands and knees for everyone in this thread to read Graeber's "Debt: the first 5,000 years." The notion that debts have to be paid is very odd. If I went to a bank and asked for a loan to bet on a horse, they'd laugh me out of the building. But if they knew that no matter what they could get the money back from me, they'd cut the check. That's where we are right now with non-dischargeable debts. Who holds risk for making loans is not an iron clad law of nature; it's a matter of political will that we have changed over time.
I've read first two chapters and had to put it down. The first two chapters clearly outlines the agenda or "the side" of the author. Nothing wrong with that. Authors side is basically
debtor: good
lender: bad
I have empathy for the horrific stories author shares, but my logic was seeking the obvious topic that never came (in those two chapters). What if lenders decided to not lend? Wouldn't that leave those poor souls in Madagascar in even worse position?
I tried hard to read that book, but really struggled to get through it unfortunately. It seemed right down my alley but I couldn't get in to it. Might be time to dig it out and try again
> I have read David Graeber’s Debt: The First 5000 Years thoroughly and despite Graeber’s readability, scholarship, and erudition, it is a very bad book. Its tone is much too polemical. More important, when it gets to the more recent history that I know well, it is riddled with errors and distortions. Beyond that, it suffers from serious conceptual confusions, and in his excellent critique, Robert Murphy has only scratched the surface.
>> How the poor debtors still sell their daughters, How in the drought men still grow fat « Code and Culture: At Unfogged there’s a review (and a very funny comments thread) pointing out that the following sentence contains six factual claims all of which are incorrect:
> Apple Computers is a famous example: it was founded by (mostly Republican) computer engineers who broke from IBM in Silicon Valley in the 1980s, forming little democratic circles of twenty to forty people with their laptops in each other’s garages
The above is a quote from Debt about Apple.
Here is the index of posts about errors in Chapter 11.
The outcome of that will be that lending standards go up substantially. Significantly higher interest rates and required collateral. The eventual end result is fewer people able to qualify to buy a car, buy a house, get a credit card, or go to college. These are significant drivers of economic activity.
Offering debt as a way to finance regular life activities like school and housing is also a good way to paper over the other, equally serious problems we currently have in the US, an explosion in the cost of school and housing, compared to what people earn.
If people didn't have debt as a way to access these things, there might be more energy for addressing the income inequality and lack of class mobility we have, that's being obscured by the access to debt.
Neither side is necessarily wrong here but we changed the law to address the problems you describe.
I see this as similar to the payday lending debate. Payday lenders aren’t creating demand, they are responding to it. What happens when we eradicate that form of lending? Most things start from good intentions.
This is true but we did it for a reason. Buying a car used to require 35% down, 12-24 month payments, and 10%+ interest.
The average price of a new car is around $30,000. What percentage of Americans can afford a $10,500 down payment and a $900 monthly payment? I’d guess less than 15% but it’s just a guess.
People shouldn’t be tricked into taking on tens of thousands of dollars in depreciation by committing to many years of monthly payments. Yes this system is good for car manufacturers, but no I don’t think that’s worth how much it ruins the finances of a good chunk of the country.
Okay, I'm imagining it. So what? There is a debate to be had about what sorts of protections we want to provide to debtors. But that's separate and apart from the existence of companies that specialize in debt collection. The latter is simply an example of economic specialization.
The problem everyone has getting their mind around debt collection is that they focus on the after-the-fact situation, instead of the whole picture. If companies cannot collect on debt, they will be less willing to extend credit. When you "help" one person who can't pay their debt, you're hurting several people in the future who won't be extended credit.
Student loans are a good illustration of this. People clamor to make student loans dischargeable in bankruptcy--citing examples of people with hundreds of thousands of dollars in crippling debt. But the median American doesn't have any student debt, and the median debt for people who do is just $30,000. Now as a practical matter, student loan forgiveness would just impact taxpayers, since almost all student debt is owed to the federal government. But if it was a normal debt market, making student loans--which are offered without any security--dischargeable in bankruptcy would cause student loans to dry up for everyone, even the vast majority of people who take on modest, manageable debt.
The problem I have with your argument is that depending on one's viewpoint, this could be a feature and not a bug. Historically, humans have had some conception of reasonable ranges of rates to charge for interest and purchases to underwrite that fall inside the bounds of ethicality, and things outside of that boundary that were deemed unethical and usurious or outright slavery.
Let's take your example of student loans. We can both agree that making student loans dischargeable in bankruptcy and not owed to the government would cause the student loan market to contract. What if you think that this kind of debt, being non-asset backed, is not just unethical but unsustainable inside a functioning free market? What if you think that many institutions have made use of debt inflation to bloat their bureaucracies, facilities and other non-academic investments via a bubble that can and should pop? What if an alternative financial product should exist that forced institutions to put skin in the game towards the permanent economic future of the students that they are ostensibly responsible for and selling a product towards advancing?
I think that we need to remember that debt is primarily a mechanism for moving around value, and that the intrinsic value (liquidity) that it provides is distinctly marginal. We as a society in America should question whether it is a robust long term strategy for the country's economic future to even allow for the option of selling an education with debt-based financing without some kind of a positive outcome guarantee. Otherwise, the incentives are almost guaranteed to result in bad actors exploiting the disenfranchised. Outside of the moral hazard here, the more unavoidable hazard is the market hazard of overleveraging assets whose intrinsic value cannot support the bonds they back, causing an unnecessary macroeconomic financial shock that could be avoided with foresight.
If student loans were suddenly unavailable then universities would have to rein in out of control costs and Maybe get rid of sports and bs admin staff.
The only reason they change that much is due to the ability of loans.
Same goes for books. Your prices for textbooks over there are hilarious. They're priced purely based on just how much you can milk the students, or rather whoever finances them.
To add on every year the text is usually reprinted/updated for the purposes of trying to kill the used book market and in many cases my professors were the authors of the required texts.
Yeah and to a captive market too. College textbook sales is one of the most insane rackets I've ever witnessed... "milking the students" is no exaggeration.
I absolutely agree. The whole “college experience” from overpriced textbooks to overpriced dorms is a huge racket. The covid pandemic might really shake things up though if there’s no school starting in the fall though.
I've advised a couple of people looking to go to school to take a gap-year to hedge risk of the schools having their stuff together.
If there's anything I've noticed about higher education after working in/with it, its that they're constantly behind the curve in just about everything that's not sports/research related.
I would be very scared of having a second-rate experience due to a college (and professors) not being prepared for this to the point I would sit a year out and crank out gen-eds at home in already established online programs.
Take this all with a grain of salt... Maybe I'm paranoid, but I just don't see schools being ready for this and having a solid experience ready for new students by fall unless they've already practiced remote learning/class programs.
When I was a sophomore in my undergrad degree one of the professors was habitually late. As we were only meeting 2-3 times a week I calculated the dollar value of that lateness as a part of our tuition. People were not happy.
Hopefully at the end of all this we realize that community colleges can teach the majority of a 4yr degree and even have labs already set up.
Both statements can be true: eliminating debt collection would massively curtail the availability of credit, and excessive credit availability practically any motive to curtail costs.
This is not true based on the amount of money originating lenders get when the sell off bad debt. Generally they receive less than 5%(sometimes less than 1%).
To the original lender, 5% of the defaulted debt generally just covers the cost of writing off the debt and maybe a bit more. It does not move the needle at all for loan availability.
That’s true once you get to the point of selling debt off. More effect would be seen if the ability of creditors to pursue debtors earlier in the process was more severely curtailed.
They became easy to get because lenders knew their loans were non-dischargeable. That completely changes the risk equation and to act like it doesn't is an exercise in bad-faith.
Federal student loans have been non-dischargeable since the 90s, and this problem has been building since then. Federal student loans also make up over 90% of student loan debt, and since 2010 have been issued solely by the Department of Education. Also, not all private loans are non-dischargeable.
No-dischargeable private loans are such a small portion of the problem that they are effectively irrelevant.
Hypothetically, what would the world look like if we made all debts dischargeable by bankruptcy, and bankrupcy a process so simple you could just text a number and be done in 15 minutes?
A bankruptcy would simply automatically put all your assets up for a same-day auction. Any unlisted items would be auctioned as a lump, for anyone willing to research what you actually owned to play 'Storage Wars' with. Anyone could bid on those assets (including your friends buying your stuff to give back to you). All proceeds of auction would be claimable by anyone you owed a debt to in a fully automated manner.
In such a world, any time you woke up in the morning and decided the auction value of your assets was below your debts, you could text the number, re-buy things you really cared about for probably cents on the dollar (nobody wants your dirty laundry), and carry on your day worry free.
If this is true then that’s a sign that we are measuring the wrong things when we talk about “the economy”. If something is good for the economy but bad for people, then fuck the economy. Find a new way to measure it that better aligned with what is good for people.
It seems quite fitting here that Goodheart’s Law came from an economist.
> If this is true then that’s a sign that we are measuring the wrong things when we talk about “the economy”.
Not necessarily.
Consider savings, for example.
Are high savings good for an individual? Well, yes, of course, they are! But every dollar saved is a dollar not spent. If everyone starts saving as much money as they can, this will damage the economy, lower spending, and will make everyone poorer (it's difficult to save money when your income derives from other people spending it.)
Debt is the opposite of savings in this respect. If you go into debt, and spend, it's good for me, as the person deriving income from your spending. Vice versa, if I go ahead, and spend that money, it will eventually be good for you, as your income is another person's expenses.
Does this mean that we should all max out our credit cards tomorrow? Well, obviously not... Just like we should not all become wealth-hoarding Tolkienesque dragons.
It's not clear where exactly the optimal point on the savings-spending axis
lies. It certainly lies on different points for different people, depending on your personal wealth, skills, social class, luck, or your personal value system, etc. Some people benefit a lot from a healthy economy. They obviously want everyone else to spend more. Some people benefit very little from a healthy economy. They obviously want to spend less.
It's not a trivial problem to solve. I personally think there are some kinds of debt that are way worse than other kinds of debt. High-interest debt is problematic. High-burden debt (Like mortgages) is also problematic. Debt that inflates asset prices (Like universal student loans) - also problematic. Medium-low interest, medium burden debt (Like most car payments)? It seems less problematic to me.
The article states that the majority of cases are for amounts less than $5k. We're not talking about student loans or mortgages here. This is the consumer finance industry. Predatory loans, high interest credit cards (but the perks!) and such. The companies behind these products thrive of keeping people in a cycle of debt. They aren't helping anyone and should probably be regulated out of existence.
Tons of nominally asset-rich people find themselves with negative cashflow and in a personal debt crunch, even with positive net worth (or plausibly positive, depending on what assumptions you make about values in an illiquid market). You're going to see a lot of this in the near future as the real estate market implodes.
There's actually a good startup opportunity here. Many of these debt collectors are unethical. You could buy these bad debts for pennies on the dollar, settle them for a very modest margin, and help the poor people fix their credit without filing for bankruptcy.
Context: I worked for 16 years for a company that did, among other things, debt collection. It was a small but profitable part of their business. We’re talking relatively low dollar bills - cell phone, cable, power, etc - rather than student loans, medical, or credit card.
There are different levels of debt collection. The first level is generally done by the guarantor. Someone falls behind on a bill, service is shut off, and the company tries to get the consumer to pay the bill. The next level is when a company sends the bill to an outside collection agency to attempt to collect on it. The collection agency will get some commission on that if they manage to collect. The debt is maybe 6-12 months old at this time. If the first agency fails, sometimes it will get sent to a second or third agency to see if they have more luck. At some point in time the company will decide that the debt is unlikely to be collected and they will write it off. It’s at this point that debt may get sold. The debt is likely years old at this point. The company that buys it will buy for pennies on the dollar (it’s like any market, sometimes it’s more, sometimes it’s less). They are then the owner of the debt and any money they collect they get to keep. They’re able to settle for much lower amounts. If you have a $1000 debt that was bought for $50, you can settle for $250 and still make a profit. The consumer is able to clear the debt from their credit report for a fraction of what they owed (though it still shows they paid it to a collection agency and that still hurts their credit, but not as much as an unpaid debt).
Long answer to your question, but yes there can be good money in it, and there is probably an opportunity here to do some good.
https://symend.com/ is doing something similar to this (no connection, but I met the local team a while back). I like the approach of "ethical debt collection from real humans with real backstories". They just raised a good chunk of change as well.
It seems like that strategy is difficult in an efficient market of unethical debt collectors, as intuitively they would be able collect a larger fraction of the debts than the friendly debt collector.
I think this is the hardest part. You would have to pay the same price for the debt as the unethical collectors and then make less off of it than the unethical ones probably putting you in the red :/
I do commercial collections (B2B). The article states, "Unlike most court rulings, these judgments are issued, as the name indicates, by default and without consideration of the facts of the complaint—and instead are issued in cases where the defendant does not show up to court or respond to the suit." I am licensed in California and Texas, and in both states one must "prove-up" a default before judgment is entered by presenting a "prima facie" case. In other words, you must prove your case before a judgment is entered, even if the defendant does not show up.
Generally you don't have to prove your case, you need to provide enough evidence to meet the prima facie threshold. In some cases, a declaration and blurry copy of an invoice will do depending on the state and the stakes.
Still in consumer debt collection, even if they can prove the debt, predatory/volume collection firms tend to fold if an answer is filed. Not always of course, since as you know many factors may come into play.
The article specifically mentions later on that California has stricter proof requirements in order for debt collectors to get default judgments. Unfortunately, most other states apparently don't do this.
I was under the impression that a well-plead complaint was sufficient if the defendant doesn't show up. What rule says you have to actually put on a case to get a default judgment?
It's a two step process. First your get the default entered if they don't respond, then you ask for judgment for damages. Maybe that's where the confusion lies. The default is entered by request almost automatically if they don't respond. Getting your judgment for damages requires evidence to prove your case.
It's not surprising when you think about it, but it's still an important problem to think about. It has the potential to cause some problems if state courts become seen as a vehicle for debt collectors more than an authority for righting wrongs.
I actually don't agree. Many debts in the US are effectively non-collectible, because all the property from which they could be collected is exempted. (This is especially true in Texas, where wages can't be garnished for most debts.)
I just meant a debt that is inherently non-collectible (and thus does not need to go to court) is not a debt.
For instance determining whether or not a house is a homestead and whether or not the debt is therefor effectively non-collectible or not is something that requires a court.
They generally settle for way less than the principle, credit card debt for one is sold for cents on the dollar (4 to 7 according to this source, though I've heard lower). [1]
I really dislike how when debt collection gets talked about, the debt collectors are the evil ones. Never mind the person who signed a contract to pay x interest in return for y money and didn't pay it back.
>I really dislike how when debt collection gets talked about, the debt collectors are the evil ones. Never mind the person who signed a contract to pay x interest in return for y money and didn't pay it back.
Those are usually pretty predatory contracts. Consumer credit isn't like my mortgage, where someone reviewed my past five or more years of finances and decided my income and assets actually justified the loan. Hell, my mortgage has a much lower interest rate than most consumer credit (eg: car loans, credit cards, etc.).
Those high interest rates are rationalized as reflecting the risk of default on the debt. Ok. So if someone is going to default, you charge the next sucker more interest, because I don't see why you should be made whole off garnishing someone's paycheck when you choose to make predatory loans to risky borrowers.
De facto, the whole thing is just privatized taxation with extra steps: the "borrower" pays a monthly tax to the "creditor" for the privilege of existing while poor, and in exchange, they are kept, deliberately, in perpetual debt.
The only loans that the government should help you collect on are those designed to be paid off in full in the first place.
What a depressing topic. Since one is responsible for his own debt and just forgiving it is unfair to those pulling their own weight perhaps the small amounts the article talks about should play part in setting the height of an initial basic income. If the income is guaranteed it can at least pay the interest over debt. It could become more interesting to get payments rather than sell peoples property and ruin their lives (and potentially their income) with all the burdens on society it brings.
Um, they literally do? In aggregate, it's a similar effect as a VC-backed company burning capital to push out competitors. You're spending money you don't have, which drives the economy, raising demand and prices. The people who don't do the same can now afford less. Then the balloon pops, and your debt is forgiven, while you've reaped all the benefits from having the extra capital that your peers didn't.
Even in a simple terms, it hurts people's sense ethical and societal obligations. Why should I deprive myself of consumption and be a responsible economic participant, when I can spend money I don't have and then have my debt forgiven?
It is only fair in the sense that people need to be able to move on. Unfair is perhaps not the right word but I struggle to think of a better description.
Ill try a perhaps stupid example I guess..
If I agree to borrow my car to you I kinda want it back eventually? In bankruptcy it becomes a conversation about who needs my car more? uhh??
Others should learn from that not to allow anyone else to drive their car (even if they badly need it) and that having the keys mean you don't have to give it back.
Banks creating money out of thin air does change the topic a lot.
I'd like to see a [small] basic income that pulls a substantial number of people out of the paycheck-to-paycheck horror movie.
I'd be interested to understand how this works in practice, especially small claims court (which is probably where many credit card debts end up at). From my understanding, small claims judgments are very tough to actually enforce, no longer show up on your credit report, and the court system does nothing to help you collect. Without getting into moralizing and just from a pure P&L perspective- how can it make financial sense for a big company to have one of its attorneys spend the day in court, when you're probably not going to collect on the debt....?
I actually think the current system works well. The only people having a bad time are people who borrow AND don't repay AND refuse to work with their lender AND refuse to come to court.
And remember, there is no free lunch here. Making life easier for borrowers who can pay but won't just means the rest of us have to pay more for out legitimate borrowing.
Seems like there are some money left on the table.
Should someone build a small company to defend all those people solely based on some contingency fee (well a tiny percentage of what they owe or would pay if they lose).
If I owe $5,000, a lawyer takes the case, and prevent me to pay the $5,000 for a $500 fee, and I never hear again about the debt collector, that seems a win-win.
Those debt collector would start to think twice before going to court, and if really working, debt collector would start to think twice before buying debts at the first place.
It could be automated, with a single website, where I enter few details about my case (or the website contacts me based on scrawling the dockets), give me free advices to fight it myself (e.g. ask debt collector for all communication to only be done by mail, as allow by law, ask them for proof of debt, etc.). And if it escalate to court, then a lawyer would be assigned to represent me.
Looks like some software could fight this court scaling issue, by fighting before it goes to court, and then making it less predictable for debt collector to go the court route.
You seem to misunderstand something. Debt collectors aren't winning cases of illegitimate debt. They are winning legitimate court cases that the defendant simply ignored. Even if you bring a lawyer to court that doesn't mean that you won't have to pay the debt. That $5000 debt was probably bought for less than $500 by the debt collector and the debt collector is willing to settle for something like $1000 which is still significantly less than the original debt.
If people don't know about the debt and it goes to court and a default judgment is issued, well, we don't know if the original debt is real or not because it didn't get tested in the court.
I've donated to organizations that pay bail for those who can't afford it and others that buy medical debts for pennies on the dollar in order to forgive them.
It's both great to know "man, that dollar went a long way"... and still feels like a tiny drop in a very large bucket.
I assume you're talking about RIP Medical Debt. As I've found success in the healthcare technology industry, they were IMO a good choice for a portion of a recent windfall. I recommend donating to them as well!
What do you mean "receive the least"? Pretty much all the social programs we have target the poor, not the rich. The poor are the ones that receive the most.
Forget mortgage interest deductions. Take a look at cash back rewards cards. Cash-using households ultimately end up transferring money to card-using households this way, because merchants don't usually set higher prices for card users to compensate for fees. See https://www.bostonfed.org/publications/public-policy-discuss...
I get an average of 1-2% off of almost everything I buy simply because I can use a cash back rewards card to do it. It's sickening.
Is there something stopping poor people from getting these cards? I mean sure, if they have bad credit they can't, but I know plenty of poor people with good credit.
This is a narrow understanding. Rich individuals are setup to benefit from the programs for the poor. Such that what you say is both true and irrelevant. Poor individuals are not benefited.
Food stamps allow wealthy people to hire help for less than it costs to feed their children.
Before anyone jumps on me, I'm not saying letting their children starve is a valid solution.
But anti-poverty programs unquestionably allow illegal immigrants to work for wages less than it would take to support their families lifestyle, which encourages them to come to the US.
Upper middle class and wealthy people benefit from that.
The other issue with food stamps is that it's pretty common for poor people with drug problems to turn them into cash by buying steaks / meat and selling to restaurants.
So the hallmarks of the wealthy Cali lifestyle end up indirectly subsidized by food stamps.
Combined with the logic that not everything that helps the rich helps the poor, it isn't that bad. Keeps you from trying to make the poor pay for policy, after all...
I’m not who you are replying to, but you can make an argument that companies like Walmart are able to pay their employees less because many of them are receiving government aid. I know I’ve seen statistics on the % of Walmart employees that are on food stamps, and it’s shockingly high.
To sum up both of your statements, the top 10% of income earners pay 70% of all income taxes, but an increasing percentage of the taxed income is derived from rents (which originate from the labor of the renter class).
It would be hilarious if it wasn't so tragic. Taking someone to court for not paying a debt and then (if severe enough) sending them to prison ends up costing the state, and tax payer, a lot more than just writing off the debt. It's a vicious circle where (on average) only the debt collector wins. It's one of many scenarios (another being healthcare) that point towards a social (not communist) solution being the only way. Civil War usually starts when a significant portion of a population can no longer feed itself...
The debt collectors' lawyers didn't arrive prepared to win, because most people didn't show up. If you can win 85% of cases just by showing up, why bother.
A court system that allows these dynamics to dominate isn't serving well.