You might recall, once upon a time, that there was numerous people who decided to camp out in Zucotti Park, as part of the ‘Occupy Wall Street’ movement. It was a pretty big deal at the time, getting a lot of attention from national media and commentators on both sides of the aisle. It lasted for several months and even added a few phrases to our lexicon (How often did you hear anyone refer to ‘The 1%’ or ‘the 99%’ prior to that event?), but hasn’t been very active lately. You’d be forgiven if you assumed that the members of the group simply disappeared, but that’s not actually the case.
Instead, the people involved in Occupy Wall Street have taken on other causes, with one of the most prominent being the Strike Debt organization and its Rolling Jubilee project. If you’ve heard about this (and I understand if you haven’t), you might know that this project is focused on buying and forgiving personal debts, but you may not be quite sure how that would work, or why it would be a major political goal. Well, this article should help to answer those questions, but first, we must journey into the dark, largely hidden world of the
Secondary Debt Market
Imagine for a moment that you have a debt; maybe credit card, maybe a student loan, or possibly a medical debt, something of that nature. Further imagine that for several months or more you can’t, or won’t, pay said debt, for whatever reason. (Perhaps because you were having a dispute with your insurance company about their coverage and whether said insurance company should be paying your medical bills, which is something that actually happened to me.) In any event, you default on your debt, at least for a short period of time.
As a result, from your lender’s point of view, your debt is essentially a loan that they will not get repaid, a ‘non-performing loan’. This is something that they expected; if you make a large enough number of loans, some portion of them are not going to be repaid. Federal law covers this eventuality, requiring lenders to charge-off the debt (that is, mark it as unlikely to be repaid) and allowing a tax deduction in the amount of the charged-off debt, so things aren’t so bad from the lender’s view. But they still have a bad debt and the federal law requires them to remove it from their balance sheets. (A result of the savings and loan failures from the eighties, although that’s getting off topic.)
That’s where the secondary debt market comes in. You see, a debt being charged off doesn’t mean that it is erased; you, the debtor, still owe the amount remaining on the debt. (This makes sense; if all you needed to do to eliminate your debts was not to pay them for a while, almost nobody would pay their debts. But more on that below.) When debts are charged-off, instead of being eliminated, they are sold to third-party debt collectors for pennies on the dollar, since the original lenders have basically given up on getting repaid and have taken a tax deduction instead. The debt collection agencies make profits by buying debts at less than face value and then get at least some of the debt repaid. If you are the original lender, getting 20% of a debt repaid is horrible, but if you paid only 4% of the debt’s face value, 20% repaid represents 400% profit.
Of course, since they aren’t making the initial loans and therefore don’t have the same need to maintain positive customer relations, many debt collectors tend to be less than ethical. The particularly nasty collectors do everything from lying about being from the government to threatening debtors with prison. It reached the point where Congress had to pass the Fair Debt Collection Action Act to prevent the most severe abuses.
So What’s This Rolling Jubilee All About?
That’s where Rolling Jubilee comes into play. The Rolling Jubilee Fund works by buying charged-off loans, much as a debt collector would. Unlike a debt collector, though, the Rolling Jubilee organizers intend to forgive the debt and completely eliminate (or ‘abolish’) it rather than attempting to collect the remaining debt. Since the debt only exists as long as there is someone attempting to collect it, this means that the debt is gone.
You might, if you’re someone well-versed in monetary issues (like say, a personal finance blog reader and/or writer), have more than a few questions about the ramifications such a system will have on the debt system. After all, if people could expect that their debts will be forgiven if they fail to pay for a long enough period of time, why would they bother to pay at all? Doesn’t this lead to a large decrease in lending? (Whether there should be less, or no, lending in the world is another issue entirely…) Won’t that in turn lead to a severe drop in the world’s financial markets?
The answer to the first question is the same as noted above: yes, if you could expect that your debt to disappear, you’d be much less inclined to care about paying said debt, and if lenders could expect such a lack of repayment, there would certainly be a problem in our financial system. But there are a few reasons that Rolling Jubilee is unlikely to cause such problems. First, it has focused on medical debt (the cause of most bankruptcies in the US, which is a story for another day); I might be biased from my own experiences, but few people want to add any more of that debt by suffering further medical problems.
Second, while the Rolling Jubilee program is quite proud of eliminating $14 million in such debt, with over $2.7 trillion in medical expenses every year, the chance of making much of a real difference how much debt exists is quite limited. Third, and perhaps most important, remember that this the secondary debt market we are talking about; the companies that provided the initial lending have taken their losses and their tax cuts. (Granted, it does complicate how lending currently works, although revisiting the rules for lending and borrowing in this country is worthwhile anyway.)
All in all, it puts an interesting idea into place: using the existing secondary debt market as a means of eliminating debt for people who couldn’t (or didn’t) pay off their debt beforehand. It also raises more than a few questions, about lending, the secondary debt market, and how debt and debt collection works in this country. I will admit, I'm pretty much in favor of the general idea, although that might just be my remaining medical debt talking…
What do you think of Rolling Jubilee? How about the secondary debt market?
Image Source: Rolling Jubilee