The American economy is crumbling beneath a crippling level of debt. While the pundits focus much of their energy discussing the mortgage crisis and the national debt, most ignore the problem of consumer credit debt which has reached over $3 trillion dollars. And yet, it is the personal debts which are impacting people on the most tangible level. When people are not able to pay off their credit cards, student loans or medical bills and they go into default this has an immediate impact on their lives. It creates pain, chaos and impedes people ability to financially recover from their personal crisis. This is who we see now in the streets of America. These are the people who are part of the “Occupy” movement. These are the people who are demanding change because it is their lives which have been falling apart and despite the government’s efforts to shore up its financial crisis it has paid no attention at all to the very real personal crisis of the average American.
What is behind the massive consumer debt crisis is ironically a debt buying market which was created to solve the problem of the saving and loans crisis in the 1980’s. America’s Federal Deposit Insurance Corporation (FDIC) needed to find a way to deal with the high rate of bank closures and their assets. The debt market was created so that these assets could be sold to institutions, organizations and private investors to recoup some of the losses and take over both the performing and non-performing (delinquent) accounts. But what has happened is that this has turned into as “easy out” for lenders who want to recoup losses without the hassle of collecting money on delinquent debts.
Lenders write the debt off as a loss and package all of the debts into bundles called “portfolios” which are then put into this market for a fraction of their worth from 7 cents on the dollar down to just fractions of a penny. Once the debt is purchased by a “debt buyer” it is then either sold or given on consignment to debt collection agencies. This is a system which gives very little incentive for lenders to work with borrowers who are in trouble or temporarily unable to make their payments and puts all the power to decide people’s financial future into the hands of the collections industry which is notorious for its corruption and abuses.
Once a debt has been purchased it no longer has any relationship to the original lender and there is no accountability or recourse for the consumer. Strict laws have been put in place to regulate the collection agencies but the reality is that when most people find themselves in debt they are economically weakened and particularly vulnerable.
At this point I ask the reader to make a shift from the normal point of view of what it means to “owe” money on a debt and to begin thinking of debt as the financial product which it has become. The original lenders have received their remuneration and no longer have any connection to these debts. Despite this, the debt itself is not forgiven. And this is where the situation begins to get murky.
If their debt has turned into a product than they are essentially not paying back what they “owe” but rather paying to have their debt taken off of their credit score (as this is the only tangible benefit from debt repayment).
The lifecycle of a debt is dramatically different than any other product. Like other products its value goes down but unlike other products, its price continues to rise (through interest and fees). The fact that nobody buys at the rising price doesn’t seem to be a deterrent to those who are holding the debt because in their business model, the few that do pay full price make up for all of the ones who don’t pay at all.
Perhaps it is time to revisit the need for this debt market and how it works. How can people get out of debt it there is a market place which incentivizes risky loans and dis-incentivizing lenders to negotiate or make payment plans. Having America’s debt market in the hands of the collection industry essentially prevents the recovery of individual Americans and therefore the country as a whole. If nothing else, this market needs to be changed so that consumers are given a fair market value price to pay off their debts.