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.
Get started with a free financial assessment.
Get started with a free financial assessment.
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:
Pro: It's Really Nice
The most obvious benefit is that buying up this debt and getting rid of it wipes the slate clean for at least a few Americans. Instead of getting harassing calls from collectors, losing sleep and trying to shield the reality from the kids, these borrowers just get a letter saying, in essence, "Hey, it's all good. We've got this one." Those who donated get positive karma, and the recipient of the letter won't see their credit rating tank even further because they won't have to declare bankruptcy after months of accumulating negative marks all over their credit report.
Con: It Encourages Irresponsible Behavior
No one would argue that bankruptcy is a week at the spa. After all, your credit report is severely penalized. But the consumers getting their debt erased will never pay--literally--for their bad behavior. This could incentivize behavior from consumers (buying more than they can afford and hoping they would get bailed out) that would hurt the economy. That's why many see forgiving consumer debt, or bailing consumers out, as immoral. In fact, readers on LearnVest have previously gotten into a fierce debate over the morality of declaring bankruptcy instead of paying the debt you are responsible for. Without learning the lesson that comes from slogging their way through, debtors might just rack up more debt.
Pro: It Could Be an Economic Stimulus
Debt, especially in the form of underwater mortgages, is holding back the economy from full recovery. Because consumers can barely scrape together payments, they aren't spending on other things like meals out, vacations or clothes. Telling someone their debt is all taken care of might incentivize them to go out and spend a little more (responsibly, hopefully) and rev the economy up again.
Con: $5 Million Is a Pitiful Amount
Honestly? Discharging $5 million in debt isn't going to be a huge economy stimulus. Total household debt has dropped since the recession, but consumers still have $2.7 trillion in outstanding debt, according to the Federal Reserve. What if the debt bundle Occupy buys is all mortgages? Then they've discharged 20 or fewer families' debt, or .000185% of all consumer debt. Even buying up a bundle of credit card debt, each chunk worth on average $20,000, would let just 250 people off the hook. It would only really make a difference if people consistently paid it forward to pay off more debt, like Occupy hopes.
Con: It's Totally Random
The thing is, it's not like you can apply to have your debt discharged. Because the bundled loans are anonymous, it's just a random lottery (though Occupy says it will focus on geographic areas that have been hardest hit by the recession).
Hey, we know that you and your hard-working family could use a leg up. But it's possible Occupy could discharge the debt of that single dude down the street who irresponsibly bought a second home that was way out of his budget.
Con: It Probably Won't Help People With Student Loans
Because student loans aren't dischargeable in bankruptcy (or only in very rare cases), they don't often qualify as distressed debt. Banks know they will get paid, because borrowers have to pay. So the debt is still worth face value to them--or even more, because they can tack on interest and fees when borrowers fall behind. With a record one in five households holding student loan debt, this scheme doesn't do much to address a growing debt crisis affecting many, including some Occupy protesters themselves. (For more information, check out our infographic.)
Pro: It Sparked Discussion
As we've pointed out, this fascinating strategy won't solve the problem of distressed consumer debt. But it has gotten people talking. After all, you just learned some more about how the consumer loan market works (or doesn't work).
Next step? What would be really effective is if the government passed meaningful measures to ease the burden of debt on individuals and families. Some possibilities include:
1. Implementing principle reduction on underwater mortgages. This is when the mortgage is reduced to the market value of the home. It benefits consumers by making payments more affordable and keeping them in their home. It benefits banks by making sure they get at least some of their payments and avoids saddling those banks with empty and decaying houses.
2. Making student loans, especially private ones, dischargeable in bankruptcy. Because private loans aren't dischargeable, many consumers are saddled with debt that is compounding quickly and accumulating giant late fees--soaring into the hundreds of thousands--even if the borrower is earning minimum wage or isn't employed at all. Making student loan debt dischargeable would incentivize private lenders to work with you on making payments feasible, or else see you declare bankruptcy. Read more about this issue here.
3. Clarifying the terms of loans for consumers. This is one of the goals of the new-ish Consumer Financial Protection Bureau, which has already been hard at work on revamping mortgage agreements to make them easy to understand.
4. Addressing medical costs. With medical expenses the leading cause of consumer bankruptcy, effective measures to reduce medical costs and bills could go a long way in bringing down distressed consumer debt.
Tell Us ...
What do you think of Occupy Wall Street's plan to discharge debt? Let us know in the comments.