The group is able to buy debt so cheaply due to the nature of the “secondary debt market”. If individuals consistently fail to pay bills from credit cards, loans, or medical insurance the bank or lender that issued the funds will eventually cut its losses by selling that debt to a third party. These sales occur for a fraction of the debt’s true values – typically for five cents on the dollar – and debt-buying companies then attempt to recoup the debt from the individual debtor and thus make a profit.
For the same reasons that no one wanted to buy the debt for 13 million dollars, that apparent 13.6 million dollar “profit” is largely imaginary. Debts that are unlikely to ever actually be repaid and so forth. There’s probably some profit to the system in terms of administration and debt collection that goes unhandled but that’s really charity for the previous debt owning institution than it is to the people who are in debt. As you noticed, people who are good investments (eg likely to pay off their debts and then be profitable) are not going to have debt that cheap.
On the whole this seems strictly worse than well-aimed scholarships.
For the same reasons that no one wanted to buy the debt for 13 million dollars, that apparent 13.6 million dollar “profit” is largely imaginary. Debts that are unlikely to ever actually be repaid and so forth.
Even if you don’t repay the debt having no debt collectors that go after you is valuable.
the fact that all income will go to debt collectors anyway
Not in any real world I know. Indentured servitude has been abolished and I haven’t seen any debtors’ pits around lately.
Specifically, the only problem is debt not dischargeable in bankruptcy, that is, in the US, just student debt. If you have, say, credit card debt—just go declare bankruptcy, I don’t see any useful consequences of a charity helping you avoid the costs of going bankrupt.
So, student debt. Is there empirical evidence that a lot of people choose not (legally) work because they have high student debt levels? Does that happen in reality? Is it a really big problem worth focusing one?
As a practical matter, also note that there are legal limits to how much of your salary can be garnished for unpaid debts. It is not 100%.
In the United States, only 25% of after-tax income on income over the equivalent of a thirty-hour minimum wage workweek, excepting alimony, child support, tax debt, and certain chapter 11 bankruptcy court agreements (none of which are types of debt a charity can purchase for pennies on the dollar).
Most types of debt that can be purchased for pennies on the dollar are also dischargible through bankruptcy, and have not reached the garnishment stage or reached the garnishment stage in ways that mean very little income is going to debt collectors.
I’m not aware enough of other national laws to comment on how things look elsewhere.
There’s some value to it, but you’d have to target the matter very carefully to get reasonable returns.
I agree that’s it’s not easy to decide. If one is interested in spending money that way you would have to see how many people get free from debt and their more specific life situations.
Cannot upvote this enough to show how much this changed my mind: OP now seems like a clever solution to the Parfit/Newcomb-type problem outlined in parent. Can we find this problem elsewhere in economics?
For the same reasons that no one wanted to buy the debt for 13 million dollars, that apparent 13.6 million dollar “profit” is largely imaginary. Debts that are unlikely to ever actually be repaid and so forth. There’s probably some profit to the system in terms of administration and debt collection that goes unhandled but that’s really charity for the previous debt owning institution than it is to the people who are in debt. As you noticed, people who are good investments (eg likely to pay off their debts and then be profitable) are not going to have debt that cheap.
On the whole this seems strictly worse than well-aimed scholarships.
Even if you don’t repay the debt having no debt collectors that go after you is valuable.
How valuable?
You might decide against taking a legal job if you can count on the fact that all income will go to debt collectors anyway.
Not in any real world I know. Indentured servitude has been abolished and I haven’t seen any debtors’ pits around lately.
Specifically, the only problem is debt not dischargeable in bankruptcy, that is, in the US, just student debt. If you have, say, credit card debt—just go declare bankruptcy, I don’t see any useful consequences of a charity helping you avoid the costs of going bankrupt.
So, student debt. Is there empirical evidence that a lot of people choose not (legally) work because they have high student debt levels? Does that happen in reality? Is it a really big problem worth focusing one?
As a practical matter, also note that there are legal limits to how much of your salary can be garnished for unpaid debts. It is not 100%.
Well, the IRS does things like this, but their debts aren’t for sale.
In the United States, only 25% of after-tax income on income over the equivalent of a thirty-hour minimum wage workweek, excepting alimony, child support, tax debt, and certain chapter 11 bankruptcy court agreements (none of which are types of debt a charity can purchase for pennies on the dollar).
Most types of debt that can be purchased for pennies on the dollar are also dischargible through bankruptcy, and have not reached the garnishment stage or reached the garnishment stage in ways that mean very little income is going to debt collectors.
I’m not aware enough of other national laws to comment on how things look elsewhere.
There’s some value to it, but you’d have to target the matter very carefully to get reasonable returns.
I agree that’s it’s not easy to decide. If one is interested in spending money that way you would have to see how many people get free from debt and their more specific life situations.
Cannot upvote this enough to show how much this changed my mind: OP now seems like a clever solution to the Parfit/Newcomb-type problem outlined in parent. Can we find this problem elsewhere in economics?
If nothing else, the value of the time of the debt collectors. There’s probably something useful they can do instead.
Become TSA agents..?