Debt Forgiveness ‘Occupy’ Style14. November 2012 by Herman Brodie
Occupy Wall Street’s (OWS) idea of using charitable donations to buy up distressed consumer debt, and then simply forgiving it, sounds very appealing. I am very much in favour of pardoning debt that everyone knows can never be repaid. This allows overly-indebted people to get on with their lives, hopefully in a more productive way. One of those ways, OWS hopes, is eventually to make their own financial contribution to the project, thereby ‘paying it forward’. The impact of a test project was impressive: according to one of the organisers, OWS was able to buy $14,000 of distressed debt with an investment of just $500. Imagine being able to liberate a struggling family from such a burden of debt using such a meagre donation. Imagine how happy it would make them. It would be, as he put it, ‘awesome’. Before, I clicked the button to make a contribution to the cause, I couldn’t help but wonder: What kind of debt can one buy for 3.5 cents in the dollar? Also, will the recipients of this aid really feel as relieved as Occupy seems to think?
Consumer debt that has such a low resale value is an asset that, clearly, few believe will ever be fully recovered. I suspect that no bank would sell it at that rate unless it had previously been valued at zero in the books. The 3.5 cents in this case would merely allow it to tidy up the lending book with a small contribution to the administrative costs. Isn’t this more likely to be debt that had already been sold by the bank to a reputable debt collector, and then resold to one or two disreputable ones? I could imagine the family in question had probably been hounded to the ground by each in turn. They’d probably lost their home already, their car, their furniture and other belongings until the debt collectors had simply stopped coming. Their only burden might be the thought that someone else might one day come knocking, but even this might have faded over time.
In this case, the OWS money would simply represent a windfall profit for a debt collection agency who would willingly dust off an old dossier for the project leaders to shred in front of the press. As for the family, who had in the meantime forgotten about the outstanding debts, they would be reminded of their past misfortune or imprudence by a kind letter from OWS telling them how lucky they were and asking them whether they would be generous enough to help someone else out.
This is all conjecture, of course, as I have no idea how accurate this picture is. I would dearly love for someone to tell me how wrong I am, though.