by Dish Staff
In an excerpt of his forthcoming book, Bad Paper: Chasing Debt From Wall Street to the Underworld, Jake Halpern (NYT) explores the morally dubious consumer debt collection business:
[Aaron] Siegel struck out on his own, investing in distressed consumer debt — basically buying up the right to collect unpaid credit-card bills. When debtors stop paying those bills, the banks regard the balances as assets for 180 days. After that, they are of questionable worth. So banks “charge off” the accounts, taking a loss, and other creditors act similarly. These huge, routine sell-offs have created a vast market for unpaid debts — not just credit-card debts but also auto loans, medical loans, gym fees, payday loans, overdue cellphone tabs, old utility bills, delinquent book-club accounts. The scale is breathtaking. From 2006 to 2009, for example, the nation’s top nine debt buyers purchased almost 90 million consumer accounts with more than $140 billion in “face value.” And they bought at a steep discount. On average, they paid just 4.5 cents on the dollar. These debt buyers collect what they can and then sell the remaining accounts to other buyers, and so on. Those who trade in such debt call it “paper.” That was Aaron Siegel’s business.
It turned out to be a good one. Siegel quickly discovered that when he bought the right kind of paper, the profits were astronomical. He obtained one portfolio for $28,527, collected more than $90,000 on it in just six weeks and then sold the remaining uncollected accounts for $31,000. Siegel bought another portfolio of debt for $33,388, collected more than $147,000 on it in four months and sold the remaining accounts for $33,124. Even to a seasoned Wall Street man, the margins were jaw-dropping.
Responding to Halpern’s piece, McArdle offers some advice to those in debt:
In general, I think it’s a good idea to make good on debts you owe, unless doing so would pose an undue legal hardship. And remember that by the time you’re dealing with an elderly debt, you’re talking to a guy on the other end of the phone who probably bought your account for a few cents on the dollar. Which means that he makes a profit even if you only pay a small fraction of what you owe. Even if you don’t agree with me on the morality of it, it may be worth coming to a settlement just to end the hassle of further calls.
Journalist Felix Salmon has developed Bad Paper for Fusion, a TV channel and website that he joined earlier this year. It’s what he calls the first of his “post-text” projects, moving into different forms of digital storytelling. More practically, though, it’s a “choose your own adventure” story where you play either a debtor trying to beat the system or a debt collector trying to get paid.
Bad Paper sets up scenarios designed to explain what exactly debt collectors can legally do, what kind of tricks they use, and just how much they’re making when someone pays them thousands of dollars to settle a debt they bought for orders of magnitude less. In some ways, you can think of it as a much more fun and informative version of the PSA quizzes meant to teach you about things like safe driving and moderate alcohol consumption. “Winning” isn’t actually as interesting as changing up your answers and seeing what the game tells you. The flip side is that by its very nature, it feels almost falsely reassuring. There’s one very specific way to beat debt collection, and as far as I can tell from the accompanying article, it’s a pretty solid one. But the inherent limit of multiple-choice storytelling is that there is one story with a limited number of endings. There are no random calamities or special circumstances. Find a way to win once, and you’ll win every time.