Deliverance From Debt

Debt is everywhere. It’s been part of the social fabric of human life since, at least, recorded history. In fact, in David Graeber’s book, Debt: The First 5000 Years, he explains that debt is the earliest form of trade, preceding even barter.

With a barter system, it’s tough to know if three chickens are equivalent to one goose and so people just ended up…owing each other.

Fast forward to today. Puerto Rico is making headlines for having immense trouble paying down part of their enormous $70 billion in outstanding debt. The credit ratings giant Moody’s is calling the situation, where the island territory was only able to make a payment of $600,000, a default. This marks the first time in Puerto Rico’s history that they have defaulted.

Student Loan Debt

Take a walk down the road and see the student loan debt bubble, almost bursting at the seams. It’s not unlike an overly excited child at a birthday party with a balloon.

The student loan debt bubble is out of control. College tuitions have outpaced the rate of inflation for decades now. Between 1986 and 2012, the prices of everything else would have doubled. Nothing you can do about that – that’s inflation. During that same time, though, tuition has nearly sextupled.

SEXTUPLED folks. SIX. TIMES.

The result? $1.2 trillion in student loan debt.

Two-thirds of students graduating from a college or universities in America will have some sort of debt. The average debt load: $26,000. One out of ten graduates will rack up more than $40,000 in student loan debt.

debt

There’s more. Car loans, credit cards, mortgages. According to the Federal Reserve, the average in-debt household owes more than $15,000 in credit card debt. Average mortgage debt of households: $156,000.

Shakespear said it best: “Neither a borrower nor a lender be.”

So, what’s the solution?

Easy: Don’t Pay Your Debt.

You could declare bankruptcy. You don’t get off scott free – the government will garnish your wages to pay down your debt. If you’re unemployed you can work with the government for “forgiveness” programs or cancelling your debt.

Before that happens though, there are some options. Because bankruptcy should always be the last option.

What happens to your debt when you can’t pay?

Debt collection agencies purchase consumer debt from original creditors, such as banks, for pennies on the dollar. The types of debt that go to collection agencies are unsecured debts, or debts that do not have some sort of collateral behind them. A car loan is a type of secured debt. There is some sort of property, i.e. your car, that can act as collateral.

Credit card debt is a type of unsecured debt.

Imagine you racked up a bunch of debt buying up collectible Teletubbies on eBay using your Visa card and now are unable to pay up.

debt

Your bank knows that there will be a certain number of write-offs every year and will simply sell your debt to a collection agency rather than deal with it themselves. These agencies buy up tons of debt from institutions all over town – hoping to collect the full amount, or close to it, and thus turn a nice profit.

There are so many people who are freaking overwhelmed by their debt. They feel there is nothing they can do. They feel trapped: suffocating in the ever-constricting cold hold of debt.

Too many people buy into the stories of collection agencies shooting out people’s kneecaps or repossessing someone’s property. But…they’re just that. Stories. They’re tales told to scare people into behaving exactly the way creditors want people to behave.

First of all: unless you are dealing with some seriously shady people, you’re probably safe from bodily harm. I mean, not definitely, but probably. Second, before a collection agency can take your property, they must first go to court.

WAIT. Before any of that happens, I mean when you get that first call from the debt collector – make sure to check the statute of limitations on your debt. It’s highly possible that the statute of limitations on debt in your state has passed, in which case the collector would therefore be unable to take you to court at all.

Don’t get me wrong, lawsuits do happen and you can end up in court. But it honestly happens less than you think. Collection agencies turn less to lawsuits and are usually quite willing to work with you. With a savvy debtor, many agencies would consider it too much time and too much effort to take legal action against a debt.

Instead they can and will settle. Often for a lot less than you initially owed. They don’t care if you owe them $2,000 or $20,000; these agencies just want to maximize their overall return. Remember, they paid pennies on the dollar for the opportunity to collect on your debt.debt

How do you settle?

Before you negotiate you have to be prepared.

Know thy enemy.

Collections agencies pay between 6-7 cents on the dollar to buy debts from institutions and 1-2 cents on the dollar on debts from other collection agencies. Finally, if they buy super-old, out-of-statute debts (yes, debts that they are legally unable to take debtors to court over) then they will spend a penny or less per dollar of debt.

Suppose you have $3,000 in credit card debt that has been charged off and sold to a collection agency. They bought that debt for $210 ($0.07 * $3,000). Even if you offer them $1,000, or a 66% discount, the agency is still making $790 on an investment of $210, and all they really care about is the bottom line.

Knowledge is power. You are now armed, ready and powerful. Take yourself off of debt row.

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