Underwater on your mortgage? Struggling with medical bills? Deep in credit card debt with no clear way out? It’s possible you could get a bailout from Occupy Wall Street.
Nope, this isn’t a TV infomercial/scam. It’s Rolling Jubilee, an offshoot of Occupy Wall Street that wants to buy up $1 million worth of distressed consumer debt, and then discharge it. As in, inform the borrowers they don’t have to pay.
At issue here is the bailout of major Wall Street institutions, who have largely come roaring back after the financial crisis. Meanwhile, many Americans still struggle with paying off their own debt, from underwater mortgages to astronomical student loans (like these women). This quote from the Rolling Jubilee website sums up their ethos quite nicely: “Join us as we imagine and create a new world based on the common good, not Wall Street profits.”
So, where will Occupy get $1 million to buy this debt from? Actually, they don’t even need that much, just $50,000. (We’ll explain the surprising financial math behind this in a moment). But even before they held their sold-out, celebrity-studded telethon last night in New York, their ticker showed they had blown past their initial goal to raise $160,000, or more than $3 million in dischargeable debt. The final tally when the variety show ended at midnight? $266,104 raised, enough to discharge $5,326,898.
So What Is Distressed Debt?
Distressed debt is exactly what it sounds like–debt held by people in financial distress, who probably can’t and won’t pay it back.
Here’s how it works: Lets say you apply for and receive a credit card from the totally fictional Miracle Bank or MB for short. You’re pumped about building your credit. But then, you lose your job. Or you go a little crazy during college. For whatever reason, you’re $20,000 deep, interest is piling up and you’re barely making minimum payments.
Miracle Bank looks at the situation and decides that there’s not a good chance you’re going to pay. In fact, they’re betting you’ll declare bankruptcy, which means they won’t get their money. So MB sells your $20,000 of debt to the debt collection agency, DCA, for $1,000. Hey, $1,000 is better than $0, right? In fact, MB has got lots of consumers just like you. So they bundle your debt up all together and sell it as a package.
Now, your debt is owned by the DCA, and to them, you’re just an anonymous consumer who probably won’t pay. Or you might. DCA is hoping more than 5% of that debt gets paid–then they’ll make a profit. Commence the harassing phone calls.
But Occupy, who is taking on the role of DCA in this transaction, doesn’t want to make a profit. They just want to make your life a little easier. And they hope that once your debt is gone, you’ll donate a little bit to the fund, hence “rolling” the jubilee on to the next lucky recipients.
Will It Work?
In the technical sense, this scheme is rather inspired. Anyone can buy distressed debt, including a loose coalition of anti-Wall Street agitators. Occupy says they’ve already tested out the concept, buying $14,000 of medical debt for $466 and successfully discharging it. (They haven’t said how many people they might have helped out.) Lucky recipients should receive a certified letter informing them their debt is all gone. And with just $25 discharging about $500 of debt, it doesn’t take much to make someone’s day.
Occupy’s bold plan raises the question: Could we just fundraise our way out of this national consumer debt mess? Here are the pros and cons: