Debt is priced based on the debtor's expected ability to repay. If you have the means to purchase your own debt, it's probably selling at very close to its face value.
I purchased a townhouse for ~$280K at the height of the housing boom. As the recession progressed, my builder went bust, and a new builder came in selling new townhomes for ~$150K.
I stopped paying my mortgage and walked away from the property. 2 years later, I called Bank Of America and negotiated to pay $2K to settle the debt. They accepted and my credit report is as if I never owned the home and walked away.
You can indeed buy your own debt at a steep discount. Its up to you to convince the debtor at how hard it will be to collect.
Disclaimer: I live in a judicial foreclosure state; it costs a substantial amount to perform foreclosures in my state, and also costs the bank to maintain the property between foreclosure and sale. Also, all of my assets were in retirement accounts, effectively judgement-proof.
It was news to me that retirement accounts are protected against judgment. Looks like it's not a complete shelter, but good enough for purposes of current foreclosure [1].
Of course, living in a non-recourse state is probably the best move, as you can't be held liable (your real estate secures your mortgage).
Something to note: Retirement accounts are not shielded from taxing bodies (i.e. the IRS).
Somewhat offtopic: This is why I always recommend people use a Roth IRA as a savings vehicle vs a savings account. Not only can you withdraw the contributions at any time, but its shielded from creditors. Your ability to use a Roth IRA is, of course, subject to income limitations.
Partly both. I needed to move for work, I couldn't sell because the value plummeted and I didn't have the cash on hand to get the loan down to the new value. When I attempted to rent it out, my association informed me that they had a limit on the number of rentals, and they were at capacity for rentals because small investors had already bought up units during the buildout to rent out to people. Had I rented it out without their consent, they were going to fine me $100/day.
I was essentially fucked. I threw my hands up and said I quit. Worked out for the best.
> If you have the means to purchase your own debt, it's probably selling at very close to its face value.
If you have the means to purchase your own debt at its face value, its probably selling at very close to its face value.
But the market value of your debt should be approximately (the amount the pricing algorithms expect you to be able to pay) minus (the amount the pricing algorithms expect to be expended in extracting payment from you).
So, IOW, for the average debtor (assuming that the algorithms involved are correct on average), the market price of their debt should be significantly less than they are able to pay.
Let us speculate a bit further and perhaps coalesce multiple debtors, repackage their debt, create a debt-repurchase-vehicle that would purchase a tranche at a significantly lower cost than face value? Someone should really start securitizing that market from the other side!
Well, there was recently a negative real shock to debt value.
So the time sequence here is:
time 0 = Creditor A thinks that lending $10,000 to debtor B will create an asset worth $20,000
time 1 = Horrible things happen.
time 2 = Creditor A thinks that the asset thought to be worth $20,000 at time 0 is now worth only $100.
It is possible -- though perhaps not likely -- for it to be the case that the average value of all loans made at time 0 to be worth less than their face value at time 0, now that we are at time 2. That doesn't mean that consumer lending at time 2 would become impossible -- it means that lenders would set rates and choose debtors such that they think that new loans have values exceeding their costs.
There are folks who negotiate the terms of the credit reporting. Paid-in-full is paid-in-full if you make it so, regardless of the terms of your repayment.
There is a scene in the movie "Queen of Versailles" (at about the 75 minute mark) were David Siegel claims to have indirectly done just that.
He said that he sent a 3rd party into a bank and they sold an 18 million dollar loan he was defaulting on to them for 3.2 million. The bank didn't know about the relationship Siegel had with the 3rd party.
So I get the sense that if you know what you're doing and know the right people you can pull it off.
This is what captures the essence of the proposal that debtors should have right of first refusal: If you are in Big Debt, you can hire a lawyer or ibanker as a stalking horse, and there is enough money in the deal to make it worth their while. Right of first refusal just reduces friction to where consumer debtors get access to the same kinds of deals.
You could probably achieve the same result if the creditor has to "mark to market."
Very easily. If you have a large debt with, say, credit card company, and don't pay it, eventually they may send you an offer saying "pay us so and so and we'll close all (larger) debt account" - or so may do collection company. That's in effect buying your own debt. Before that, though, they'd probably ruin your credit and harass the lights out of you.
> Before that, though, they'd probably ruin your credit and harass the lights out of you.
They'll also tack on every fee and penalty they can, so that when it does proceed to collections, the amount owed is much more than the prior balance. So if I had the cash to buy my own debt, I'd probably just make minimum payments with that money and look for opportunities to consolidate debt to get the lowest APR.
Most of the time, when your debt has been sold off to a collection agency, you can negotiate with agency to pay a reduced amount, since it's the easiest outcome for them.
Pay it off early. So long as your debt contract doesn't have a huge penalty for early payment, you can save tons of money.
For example, a $500k home loan at 3% over 30 years costs $258,887.26 or more than 50% of the original loan amount!
I've known a couple folks with poor credit scores who bought cars that would cost them almost double the purchase price over 5 years because the interest on their debt was so high.
Interest rates on 30 year non-jumbo loans for a while were under 3%. I think they're edging up to 5% now.
If your debt is at the rate of inflation it's basically free debt so it basically just becomes a time-value of money exercise. It's cheaper to pay off your debt now then in the future.
Correct, it's better to invest the money elsewhere if you are servicing "free debt" and you can gain more money than you lose to the debt. Don't just compare raw percentages, but compare the actual dollar value difference.
How can I purchase my own debt? Rather than have someone else buy my debt at a reduced rate and abolish it, how about I buy my own?