Anyone fancy setting up a charity?

When the Occupy Wall Street folks started to buy up debt to cancel I went on record as saying that I thought this was a damn good idea. Pretty sure I sent them a little cash as well.

The Guardian has a piece considering whether it would be possible to make this work in the UK. They think it would be:

Typically, these third-party debt-chasers pay 10p for every £1 of debt bought and expect to claw back about 20% of the debt. It’s a profitable business, worth around £800m a year and, largely, the banks only deal with big players who can buy up some of their toxic debt packages in one go.

The darkest corner of the debt market contains the bottom-fishers who buy the debt that the more visible and scrutinised players give up on. So the cycle of hassle begins yet again – from a firm the debtor has never heard of. In theory, a group of well-meaning individuals could at this point set up their own company, buy these debts and cancel them. Which means, finally, the indebted person would have the wolves called off – and the charitable group, such as Occupy Wall Street, could claim it is abolishing millions of pounds of debt for much much less.

Among the accounting and legal types who read this blog we probably have one or two who know more about the details of this market.

Interesting question would be how is the market sliced and diced? For example, are there separate markets for utilities debt, consumer debt and so on? Secondly, what’s the market size? £10k nominal? £1 million nominal?

I’m not sure that I’m being serious here but it might be rather fun to actually try and work this out. Possibly even to set up as a charity with the express intention of collecting money solely to pay off such defaulted debt. Quite possibly for no reason than just to have fun being the right wing capitalist bastards we are while doing it. You know, to cause the head asplodey reaction in the lefties.

“A Random Act of Kindness” has a ring to it as a charity name, doesn’t it?

21 thoughts on “Anyone fancy setting up a charity?”

  1. Isn’t there an incentives problem? What starts as a £800 million problem involving people in genuine hardship may soon grow to a much larger one with people who are simply after free money. Won’t a lot more people default on bank loans and payday loans, then do anything they can to avoid paying in the hope that it’ll get paid off for them?

  2. @ Alex
    It would have to be a charity that stated up-front that it was going to wind itself up when it had spent all its initial capital and that would be exhausted on purchasing debt that had *already* been sold by the banks/credit card companies to first order debt collectors.

  3. In England and Wales those in most need can apply for a Debt Relief Order. Conditions apply (I quote The Insolvency service):
    “You must be unable to pay your debts.
    You must owe less than £15,000.
    You can own a car to the value of £1000 but the total value of other assets must not exceed £300.
    After taking away tax, national insurance contributions and normal household expenses, your disposable income must be no more than £50 a month.”
    The Grauniad seems to have overlooked this provision which relieved 31179 people of their debts last year.

  4. So would people now think “Great, so when it all goes tits up next time maybe if I don’t pay off the debt someone will cancel it”.

    Not sure if there are incentives here and if people will explicitly (or subconciously) respond to them.

    Similarly with the next housing crash – if banks do no reposess properties, and the government pays your mortgage interest for you, does that mean people will load up with more debt on bigger houses?

  5. I saw this story in the Guardian yesterday and had two almost simultaneous thoughts.

    1. Brilliant! The leftists get to understand the whole concept of charity and how it works versus welfare. Plus it has the extra benefit of depriving them of funds they may otherwise use to cause trouble.
    2. After a short while of spending their own money how long will it be before a pressure group starts up to do the same thing using taxpayers money?

    I’m taking bets.

  6. There is a problem with this – it encourages free riding creditors.

    Say Bleeding Heart Liberal PLC (“BHL)’ buys up leccie debt at 10p per pound with a view to writing it off. Simultaneously Worstall PLC buys gas debts at 10p in the £ hoping to get 20p. Worstall finds out about what BHL is doing. Now Worstall PLC knows the debtor is better off. It goes for 30p in the pound when it would have gone for 20p. The debtor is no better off than he would have been

    Alternatively, even if Worstall just goes for a quick win of 25p, Wonga (who in this example didn’t sell their debt) just collect more than they otherwise would have.

  7. Having said what I said above, I read somewhere that Irish mortgage borrowers in default are sometimes better off if a hedge fund buys their debt.

    The hedge fund just wants quick profit having bought the debt for buttons. The house is worth miles less than the mortgage. And the law of repossession in Ireland is based on the assumption that the claimant is a famine era absentee English landlord. So the hedge funds will do a quick deal at cents in the euro. Borrower ends up with a house worth bugger all, but no debt.

    State owned Irish banks OTOH hand are politically constrained from just letting people off massive debts. Often it’s the more speculative purchasers who are the ones most likely to have their loans sold (and written off).

  8. What Luke said is a good example.
    I recently spoke to a hedge fund who is doing this in Spain. They are buying defaulted consumer debt from Spanish banks (for roughly 5c to 15c in the Euro), then going to the borrowers saying “pay us 20c and the debt will be paid off”.

    As I understand it, the original lender cannot do this for legal reasons (not just political) – probably something to do with “treating customers fairly” (let one off, and it gets very hard to not let them all off).

    The benefits for the selling banks are that they take their losses (which they should have provisioned for) & move on. The borrower gets out of his/her unaffordable debt – without bankruptcy etc.

    And the hedge fund (it if has got it’s sums right) makes a decent (but risky) return.

    To me, this is a great example of the right kind of capital (that is happy to take a significant amount of risk) being put to work in the right place (i.e. replacing the risk averse bank capital that was there in the first place) – which then allows everyone to move on and get on with life without worrying about their bad debts.

    And guess what – because this capital should earn a return, there will be MUCH more of it around to enable this debt forgiveness than the charities will ever be able to find. The estimate I have seen suggest there is EUR1-1.5tn of this stuff out there.

    I’m looking forward to the Guardian headline “Hedge funds forgive EUR1tn of debt to The Poor”!

  9. Much of this debt is uncollectable, and the collectors work by deluging the person with phone calls and letters until they give in. So your best method as a charity would be to just tell the people to ignore the debt collectors, which would be considerably cheaper than paying off the debts.

  10. It is also worth noting that the biggest debt of all, the National Debt, is never paid off. We are told that this is a good thing, as the inflation of this system “stimulates” the economy.

    Perhaps we should give awards to consumers who borrow vast sums and don’t pay them back, as a reward to them for similarly stimulating the economy and providing employment to others, since they have purchased consumer goods with the debt that would not have otherwise been purchased.

  11. Luke and Portamat have got to the nub, I think.
    Investment debt (buying a house, setting up a business, etc) is often protected (limited liability) and negotiable. Emergency debt (legal, medical, children, tax, etc.) remains personal and very hard to negotiate with the creditor.
    Bad investment decisions deserve to be punished (maybe at a non-punitive rate, according to taste). Emergency debt should be looked at more carefully to find a work-through. But as IanB implies, we’ve got the balance between the two wrong.

  12. I think one intersting thing here is that we have a kind of self-regulating system already, which has a bit of an anarcho-capitalist flavour to it. It’s the credit rating system.

    As the article says, most bad debt doesn’t get paid (it quotes only 20%) and once somebody defaults on their credit card or whatever, the debt rapidly depreciates in value to pennies on the pound and is sold off to debt collectors. So- as an aside- paying off debt X won’t go to the original creditors anyway, since they’ve already sold it.

    But people don’t primarily pay debts to avoid debt collectors. They pay them to keep their credit rating good. The punishment for not paying a personal debt as such doesn’t even need the involvement of the legal system; it is the punishment of getting locked out of future borrowing. Once you’ve gone bad, you can’t get credit cards, mortgages, on the HP, and all that. That’s enough of a threat to get a sufficient quantity of personal debt serviced to keep the industry functioning.

    If a charity were to have a meaningful impact by paying off large quantities of these debts, it would certainly have some influence on the current operation of this market, which may end up being negative; for instance, encouraging debt collectors to go heavier on debtors in the hope of getting the charity to pay off the debt at par. It is worth remembering that collectors will often offer debtors the chance to settle for a fraction of the debt, e.g. you owe £10,000 on your now dead credit card, they’ll cancel it for £3,000, or whatever. That would be nullified.

    I can’t help thus wondering whether it would be better to leave well alone.

  13. Your charity could become self-funding by buying debts at 10p in the pound and offering to settle with the debtor for 12p.

    Would it create a perverse incentive? Probably not – it’ll be too small and too random to have any macro effect.

  14. You’d have to settle for much more than 12p, because most 10p debts are not going to be paid at any price, which is why they’re only worth 10p.

  15. “hey pay them to keep their credit rating good. The punishment for not paying a personal debt as such doesn’t even need the involvement of the legal system; it is the punishment of getting locked out of future borrowing.”

    Soon there will be a law forbidding the exclusion of people from future borrowing because of past dishonoured debt. It would be ‘unfair’ to these people to do so.

    All in the interests of social justice.

  16. I refer everybody to my first post.
    It can have a massive benefit if it specifically states that it only relates to past debts and, preferably, it only reveals its existence after it has spent all its money.
    If one of Tim’s supporters can, and is willing to, put in the effort to run this charity* I am willing to toss in a couple of £k but it needs to be specifically designed to only help existing debts.
    * I have delayed my retirement due to the abysmal slump in annuity rates, so cannot do it myself.

  17. John 77,
    noted, though I liked your second post better.

    I think you’re worrying about freeloading debtors too much, and not enough about freeloading creditors (see my first post). Problem is you can’t keep a charity secret – you have register it. And who is more likely to find out about it? Worstall Loan Shark’s hedge fund, or impoverished debtors.

    Not that it isn’t an interesting idea.

  18. @ Luke
    Yeah, but …
    The charity would be set up by one of Tim’s readers, collect some cash from us old fogeys, buy up loads of debt and forget about it (because we’re old and possibly senile) and *then* let people know that we exist and no way will we take over future debt.

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