The People's Bailout

Forgiving the debt is not meaningless: it's a big chunk of money you don't have to pay off. Granted, it's better to work with the creditor and get them to settle for a smaller amount, but a $15k debt removed from your record is not likely to cause you $15k of increased expenses over 7 years.

To be able to rack up significant debt, one much have great credit for several years in a row so that your line of credit can be expanded upon year after year. I reckon it takes 3-7 years to be able to get to a credit line of $30k because you choose to default. In that time, the creditor is likely to make a bunch of money on that assuming you maintain rolling debt because of interest in the interim. Only in the case where you keep upping your credit line, but don't use any of the money until you plan on sucking it dry to you maximize the take on a scheme like this. Even then you get at most $30k and then have to wait another 10-12 years to be able to try that scheme again.

There is absolutely nothing wrong with this at all. The creditors are simply selling the debt to try and recover something from their original loan; getting more back than the would have a week ago is great. It doesn't matter to them whether the buyer is going to forgive the debt or collect it with men in leather jackets and hammers; they've sold, they've got back a few cents on the dollar and it's not their problem anymore.

How does it work? The debt is an asset belonging to the original creditor. To use the $14,000 example in David Rees's post, creditor XYZ made a loan to debtor ABC for, say, $10,000 a few years ago. They made that loan expecting to receive $14,000 back over time - that's why they did it. Now, ABC looks unable to repay the debt. The obligation still exists, but it's no longer practical or profitable for XYZ to try and recover it. XYZ has no men with hammers, no provision for accounting for irregular payments or special arrangements and no real interest in hanging on to this now-useless asset. Luckily for them, there are other companies which do want that asset, but because of the difficulties in collecting on it they're not willing to pay a lot. $500, in this case. It's worth spending $500 with the hope of collecting $14,000; if you spend $500 enough times then you'll eventually get back a few $14,000s and now you have a business. The price reflects the probability of getting that money back. In this case, very, very unlikely indeed, and if something's that cheap on Wall Street then you can be sure nobody wants it.

So that debt is bought and sold like anything else, according to the business needs of the various people involved. Your old neighbour's beaten old '68 Mustang might have been a piece of junk to him - it was too rusty to pass inspection - so he sold it for a few thousand, happy to get rid of a problem. To a specialist in vintage Fords, though, that car is worth a lot after they put the work in.

In this case there is an opportunity for a body with a bit of spare cash to benefit individual debtors by forgiving their loans, while helping creditors stay in business - and their employees feed their families - by buying their crappy assets at market rates. They are adding both charity and liquidity to a gummed-up market with very real people suffering in it.