If you get taken to collections over a trivial amount (<$100), its not into taken account for your credit score (latest FICO model fixed that).
Have to go to court for collections? The first words out of your mouth need to be, "Verify the debt." Ask them to produce the document you signed and agreed to. In the vast majority of cases, without this, your case will be dropped with prejudice. This is based on research I did while dealing with a personal mortgage "issue".
Not all collections agencies are so sloppy and unscrupulous. If you do owe the money and they do have the documentation to support it, you may well have a judgement against you and that definitely will hurt your credit score.
Some companies (like say gym membership) have internal collections departments that can be quite aggressive. They would certainly be able to back up any lawsuit.
In general, you really want to try to avoid being sued.
You're right; occasionally you'll find a collection agency that has their act together. Luckily, collection agencies purchase their debt for pennies on the dollar, so they're happy to get anything. Start by offering them 10% of the debt, and go from there up to no more than 25% of the debt, stipulating (in writing) that its "Pay For Delete". This will require them to remove the negative credit information from your credit report/profile in return for payment.
4 states prohibit wage garnishments at all, and other states set the maximum at between 15-25% of your disposable income: http://www.walkawayfromdebt.com/worksheets&charts/wage-garni... (Disclaimer: Colorado SUCKS. They permit up to 75% of disposable income to be collected).
I've helped negotiate away quite a bit of unsecured debt for close friends. Its easier than you think.
Debt isn't a moral obligation, and to somehow frame it as such is dubious at best. If you as a debt owner or servicer can't keep your books straight, you have absolutely no business attempting to collect on a debt. If you're taking someone to court or attempting to take their wages, you better be damn sure you're in the right.
So when an individual borrows and fails to repay, there is a moral hazard, but when a business declares bankruptcy and restructure, that's smart business?
Debt is a contractual issue, not a moral one. As HackerNews entrepreneurs should keep in mind, its the ability to easily shed debt (and not be shackled to those debts for decades) in the US that creates the environment for startups to take the risks they do.
The moral obligation is to TRY to pay it back. I fully concede that it's not a black and white issue, but there's a big difference between refusing to pay a debt and being unable to pay a debt.
If you borrow money for any reason with the understanding that you'll pay it back, but you secretly intend to keep it all along, then you are doing something wrong (morally if not legally).
> If you borrow money for any reason with the understanding that you'll pay it back, but you secretly intend to keep it all along, then you are doing something wrong (morally if not legally).
We are in complete agreement then. To do otherwise would be, in my opinion, fraud.
Am I not reading often on HN about long-term agreements startups in SFBA are committing themselves to (specifically real estate/office space leases)? That's a debt, and when a startup burns up, any time left on that lease is a debt left unpaid. Debt is not just VC money in hand.
I think the issue is assuming the company charging the account are behaving in a moral manner.
Changing terms after the fact, dark patterns, charging for things the customer didn't agree to, over billing for cable services in the hope the customer just doesn't notice or gets worn down by trying to fight it.
There are a lot of times the corporation is unequivocally in the wrong, but they already billed your card and you have to fight to get it back. Being able to cancel the card first and force the corporation to take you to court and prove their case could help put the consumer on a more level playing field.
Except that's not what happens, you borrow money with the explicit notion that you might not repay it; that's what sets the interest rate, both sides know that going in. There's nothing at all immoral about choosing to suffer the hit on your credit rather than repay as both options are expected possible outcomes in the original deal.
> you borrow money with the explicit notion that you might not repay it; that's what sets the interest rate, both sides know that going in.
The interest rate is set by the fact that money-NOW is worth more than money-in-a-few-months-or-years. This is also the case if it's certain you will get the money.
I never considered that risk would also be a factor in interest rates. It makes sense, but I really doubt it's a very big factor. Since in most cases debt means you will eventually get the money back, the risk is very little (depending on economic health, I guess). But the "money now vs money then" factor is always present.
Can anyone with a little more insight into these matters inform us whether risk of not being paid back actually represents a substantial amount of the interest rate? Cause I doubt it.
> There's nothing at all immoral about choosing to suffer the hit on your credit rather than repay as both options are expected possible outcomes in the original deal.
Is that how it works in America? Because as an outsider, this sounds very weird to me.
Say you have a debt with me, you fail to repay me but instead you opt to "take a hit on your credit score", which is, I presume, some sort of abstract "score" number kept by agreements between cc-corporations, banks and such? (or is it a government thing? probably not)
So this credit score determines whether you can get certain loans at banks, interest rates for your credit cards, stuff like that yes?
In the mean time there's me. What do I care about your credit score? Do I get to think, "hey I didn't get my money, but at least that guy is going to have a shitty time securing loans from now on and having a stable financial future". How does that help me? You still screwed me over by not paying me back, and the simple fact that, in the process, you also screwed yourself over doesn't help me at all. I'm not the vindictive kind, and some abstract revenge credit score "punishment" you suffer in your standing with other institutions won't get me my money back.
See, this doesn't make it moral, at all.
The fact that we both know, if you don't pay me back, you'll be screwing yourself over by means of credit score, just means that I might be more likely to believe you that you'd rather pay back your debt than suffer that hit. Meaning less risk for me. But if it turns out that not paying and suffering the hit is in fact a serious alternative option for you (instead of a deterrent), you may as well say "I'll pay you back or I stab myself in the eye"--what do I care? (well in fact I would prefer if you didn't, because in my personal ethical framework, such deals themselves are immoral)
This analogy doesn't relate to OP's comment. He's talking about secured debt with institutional lenders, not interpersonal loans. Risk is an integral component to determining your interest rate in the US. This is why there is an industry around protecting, understanding, and improving one's FICO score here. Try getting a good loan with a crappy (or substandard) credit score.
Risk is THE biggest factor in interest rates. If it was all timevalue we'd be paying interest closer to inflation rates.
Put yourself in the shoes of a lender. On one hand is a doctor, $300k salary, looking to borrow $30k for a new boat. 780 fico. On the other is Trevor, a bartender who makes $25k a year, has a 680 fico with some late payments and a cable bill collection from 2 years ago and wants $30k for a new car.
Would you lend to them both at the same rate? Both will have the same time value effects....
> The interest rate is set by the fact that money-NOW is worth more than money-in-a-few-months-or-years. This is also the case if it's certain you will get the money.
No, interest rates are a measure of risk; the bigger the risk of default the higher the interest rate. Bad credit score equals very high interest rate.
Secondly, stop pretending you're the lender, we're talking about banks here, not personal loans from friends.
When you take out a loan with a bank, it's a business deal with explicit exit strategies baked in: pay off loan, or default loan. Both options are valid exits according to the contract. Morality simply isn't a factor in this equation.
The bible calls for a debt jubilee - forgiveness of all debts - every seven years. No such thing has happened in hundreds of years. So who acting immorally, again?
There's some ambiguity in the scriptures. See Deuteromy 15:1-11:
"At the end of every seven years you must cancel debts. This is how it is to be done: Every creditor shall cancel the loan he has made to his fellow Israelite. He shall not require payment from his fellow Israelite or brother, because the LORD's time for canceling debts has been proclaimed."
It's interesting to imagine a world where there was no legal recourse to someone not paying back debt: easy to imagine some first-order consequences, harder to see how it'd change the grand scheme of things. I suspect it would end up being a much better world, but I come from a very anti-debt perspective.
> It's interesting to imagine a world where there was no legal recourse to someone not paying back debt [...]
I think it sounds scary. If I enter into a contract that says I have to do something in exchange for something else, I'd like a court to honor that contract, and not -- somewhat arbitrarily I'd say -- declare debts in the contract invalid after seven years.
Imagine no one being able to issue debt with a maturity of more than 7 years. That would be the consequence of such an interference into the market. This means our economy as a whole would become even more sensitive to interest rate volatility, as you can't secure the interest on a loan for more than 7 years at a time.
I think it would be even scarier than that. I imagine very few people would even issue debt. I know I would not. People default on debt all the time now and there is some legal recourse. I can only imagine how many people would default if there was no consequence. So now even people with every intention to repay their debt won't even get it. I believe that this would lead to an even bigger class gap because people who don't have the money to start businesses, buy houses or cars, etc no longer can get a loan to do it. I think it really would create a bigger divide between the Haves and the Have-Nots.
I'm not saying that having a bunch of debt is good. But imagine where you'd be right now if you couldn't get a student loan for an education. Or finance a car or a house. I'm pretty sure I would not be where I am now if I hadn't gone to school... which I would not have been able to do without a student loan. And I never would have been able to get a house without a loan.
My perspective is that a whole lot of our economic problems (in the USA) stem from personal debt. It wouldn't be the end of the world if people typically had to earn enough money to own a house before buying a house--in fact, it would decrease home prices, since the ability to get mortgages and the promise of government violence if you don't pay them back inflates the cost of housing stock. And student loans are literally slavery--they similarly inflate educational expenses, and even worse can't be discharged in bankruptcy. An end result is otherwise educated people face a large marginal tax rate that cuts into productivity, and far too many choosing education that is mostly a waste of money since they don't have to pay for it, until some unforeseen point in the future.
I think it's also easy to overstate how much loaning would decrease. The widespread use of credit scores when issuing loans belies the idea that it's only state violence that ensures people pay back debts.
Why do you want the court to honor the contract? (Which is a bit euphemistic, to my mind: it means to use organized violence or the threat of it to extract value from someone.)
Maybe it'd make sense in a totally anonymous world, but why not just do business with people or entities you can trust? Think web of trust. That's what consumers and businesses de facto do nowadays anyway.
You could still issue debt; it's just you can't expect to have violence to back it up. Past decisions and alignment of lender and borrower self-interest determine the likelihood of it being paid back.
Agreed. But I wouldn't say that MOST debts are a moral obligation.
If you borrow money, and you agree to pay it back, there should be a good faith effort to do so.
But that is only one type of debt.
In the US, where I live, Apartments are incredibly bad about charging fees after you move out, and give you very little recourse before sending you to collections.
Parking tickets, and red light camera tickets are huge sources of revenue for the city, and Seattle uses them when they need to increase city coffers.
I look at it this way, if they're not going to play by the rules, I won't either.
If I borrow from a person, I'll bleed to death in the snow to make sure they get paid back. But from a corporation? Their losses are priced into their interest rate. I'll still pay them back of course, but if I lose my job, have no income, I'm not crying over it.
That sounds exactly like my justification for stealing! Businesses usually have insurance to cover losses from theft. (And if they don't, that's on them.) And who's paying for that insurance? Right: Their customers. So it's kind of like: Unless you steal from them, they're stealing from you!
You're entitled to your opinion. Perhaps you'll understand the other side when your small business pops, you've got no income, and you exhaust any savings you have.
Now... imagine your small business popped, you had no income, and you exhausted all your savings... because too many of your customers didn't pay for the goods/services they obtained from your small business. That is quite the moral pickle to be in, if you ask me.
(Forgive me if I misunderstood... but your reply to my comment leads me to believe your business went under due to people skipping out on their debt to you.)
I'm sorry for your loss. But this is why we should all strive to repay our debts... even to corporations[1]. I would imagine that some of your customers that stiffed you may have had the very attitude you described when you said "But from a corporation? Their losses are priced into their interest rate." They, too, may have assumed that your loss was priced into your rates. It must not have been. Perhaps other businesses don't either. It makes you wonder just how many people/business get totally screwed by people defaulting on debt to them. You suggested that chasing might understand differently if s/he had lost a business. Of course you are also entitled to your opinion. But, honestly, I'm a little sad that you don't see the other side of it, having been shattered by people not making good on their debt to you.
[1] I understand that Corporation ("big C") is generally directed at the big, huge things like Walmart and Chevron. But corporation ("little c") is just a legal term and can still be the small business down the street.
I agree! Paying for things you've taken from corporations only helps perpetuate the Global Corporate Hegemony. Racking up a bunch of debts and then making excuses about why you aren't obligated to pay them is probably actually more morally correct than paying for the things you take.
Unless you take things from people. People are different. Then you should pay for those things by bleeding all over the snow or whatever. (I don't know how money works in your country. In the US we usually just use dollars. There's not much snow right now and having everyone's blood everywhere can lead to public health problems. See also: Ebola.)
Anyway. Thank god there are no people at corporations. And thank god all corporations are the size of Walmart and can easily withstand financial losses due to non-payment.
Let me get this straight, you don't feel bad about owing Walmart $10, because they factor that loss into their business model, and expect it to occur?
Well, you should care, because they factor it in by increasing prices for consumers. You're just getting everyone else that shops at Walmart to cover your debt. That's irresponsible, and I see no difference between owing Walmart $10 and owing your friend $10.
Indeed, perhaps your morals are different. I generally believe the whole CC industry is on extremely shaky moral grounds. More like sinking sand really. It only works because it can wreck poor and down-on-their-luck people.
This[1] is the type of situation where I believe the victims(yes, I'm using that word) deserve to have their debt removed.
It's possible that you will change your mind after reading David Graeber's _Debt: The First Five Thousand Years". If not, it's still a fascinating book tracing the creation and evolution of monetary and credit systems from antiquity to the present day.
I second the recommendation below to read Graeber's "Debt".
It is really a fabulous book, and can help explain why many people in many cultures feel as you do, who benefits from that belief, but also how debt has never historically been about moral obligations but has always been a contract between two parties, with limitations on both party's obligations.
a bank reposessing a house and ousting a family is a much more immoral act than being unable to pay for one. moral considerations in interactions with a corporation is foolish
The day that credit becomes a civil right, I move to Mongolia. You pay for what you have; nobody owes you anything. To view a house as some natural right is an upside-down view of the world to me.
natural rights are arbitrary and we decide what they are as a culture. god didn't pass your right to free speech to moses on mount sinai. i'm not arguing for guaranteed credit (as i already oppose capitalism) but i think guaranteed housing is both noble and easily achievable in the developed world
Believing that housing should be a natural right may be a reasonable position (even if I disagree that it is practical), but surely you don't believe that everybody is entitled to indefinite ownership of an arbitrarily expensive house. I don't have statistics, so correct me if I'm wrong, but I think most people whose houses are foreclosed end up paying rent for an apartment, rather than living on the street.
opposition to capitalism entails opposition to private property, as the latter only emerges from the former (in the formal sense, where one of the states' primary roles is enforcing property law). i don't claim to have a roadmap for how this would be incorporated in the united states were the social order suddenly upended
I thought we were just talking about whether it's immoral for a bank to foreclose on a home owner... Not sure where all this opposition-to-capitalism stuff came from.
It's not a sloppiness on the part of the agency. Often the companies selling their debt to the agency provide no other information besides the information about who the person is and how much they owe. The agency often can't produce verification of a debt because the sellers of the debt don't provide it.
> In general, you really want to try to avoid being sued.
In reality, companies will do almost anything to avoid suing you for small amounts of money. The financials don't make sense. E.g. how much gym debt would it take to justify a lawyer's fees to pursue you? Not less than several thousand dollars, probably much more.
Depends. I've personally been to small claims court and seen what appeared to be a staff attorney for Capital One suing dozens of people for overdue balances.
I'm pretty sure the big gyms that have in-house collections. I would imagine people signing a year contract and then changing their mind and trying to get out of it happens quite often.
This might be true under the US legal system, where as I understand it each party usually pays their own costs. In a loser-pays system, particularly one with an efficient small claims procedure, the conclusion might be different.
In any case, if you're wilfully and knowingly taking on debts you can't repay and using a card like this to CYA, your bigger risk in some places might be getting arrested for criminal fraud. Good luck ever getting credit again whatever the CRAs say about you if you've also got a criminal record for a fraud-related offence.
Actually, the question you should ask is 'where is your witness?' - the lender needs to have more than documentary proof of your debt.
Here's how the process plays out:
When you owe a debt what happens is the lender will contact you a few times and then, if you don't pay, they will sell the debt on to people who are in the collections business. And over the course of a year or two your debt will likely change hands multiple times, at incredible devaluation. (Listen to the This American Life episode, it's great in this regard.)
These companies will make all sorts of outlandish claims about what might happen if you don't pay. In reality, nothing at all will happen outside of the hit your credit rating will take if they take the issue that far. All things considered, that's a non-issue for most people facing debts they have no way of repaying.
In the not very likely event you are actually summoned to court, what will happen is that the lawyers working for the current owner of your debt will try to strong-arm you before you go before a judge. They'll say 'let's settle this now before things get serious in there' etc., and will offer to accept a fraction of what the paper says you owe.
That's when you ask, 'where is your witness?'. The chances of the 2nd or 3rd collection agency to purchase your packaged debt being able to haul into court the very same loan officer who witnessed you sign for a loan years ago approaches zero for cases involving less than seven figure sums.
Source: advice given to me by a debt counselor during my own business loan default 'issue'.
Update: the idea of bad debt ruining your credit score is a myth. I defaulted on a high-five-figure debt and two years later qualified for a six-figure mortgage with a mid-five-figure income. Most of the talk of 'this will go down on your permanent record' is FUD.
On point #1, I can assure you the actual person / officer who witnessed you sign for a loan does not have to be present. In fact, the vast majority of debt involves no such person - a lending contract is often undertaken electronically. What they will show is the contractual agreement of terms with your signature (physical or electronic). The original lender will not be there and in fact no longer "owns" the debt, having sold it to a collector. Even the collection agency won't be there, they generally hire someone locally (you must be sued in your location, not theirs) to be present in civil court.
On point #2, also false. Bad debt impacts your FICO score - often severely - but that impact is lessened with time. A 90-day or 120-day late (effectively a charge off) can ding a score 20 - 150 points easily depending on other credit factors. Shrugging your shoulders and saying "this won't be that bad" is not a good policy. While the record is not "permanent" (7 years for standard debt, 10 years for bankruptcies), they can have a significant impact.
Of course this is only my personal experience, your mileage may vary, but I just checked my credit report and the loan I defaulted on less than 5 years ago is not on it. At all. The single blemish is a department store credit card payment marked 30 days late in 2012.
This is after 3+ years of daily collections calls from half a dozen companies pursuing a high five-figure debt.
The takeaway being: debt is a business phenomenon and discussions about it are a negotiation. I negotiated hard; when my offers of partial repayment were refused I never answered their calls again. In fact I created a special, looong outgoing voicemail message that sounded like I was answering the phone ("Hello? What? Hello? Are you there? Okay, a large pizza? We don't do gluten free!") and forwarded any unrecognized number to it straightaway. Just maybe that made someone laugh and they decided to toss my file.
Had I gotten a summons, I was advised by a lawyer to demand a witness. I never tested that tactic, but I do suspect that if someone had the means to extract money from me they would have, and they did not.
It's all about recoverability and risk over return. Most of the time a 5-figure debt will be worth the effort. When you start getting into $5k or less debts, it's sort of a crapshoot. The original owner of the debt will often sell it for pennies on the dollar, at which point a collector will do their best to get as much as they can out of people without a civil case, because civil cases are expensive and there's no real guarantee of return (people with no money, people on the verge of bankruptcy, etc).
The general advice is not to negotiate at all with creditors. Once something's gone into collections, you will see no benefit to resolving the debt other than mitigating your risk of a law suit. And even at that point, the first phase is a mediation option wherein you'd again be able to throw out a number, do a payment plan, etc.
Did you know there are actually a dozen+ different Fico scoring products, several versions for each of the big 3 credit agencies and several product-specific models for Houses, Cars, etc?
Lenders do not update to the latest Fico version the way we all buy new iPhones. Many lenders integrate Fico scoring into proprietary models.
Having ANY collection will hurt you, period. Even under $100. Even if it doesn't drop your fico, American Express for example won't open you an account with an open collection. Any mortgage lender would make you settle the collection before closing. So in summary, i think your advice here is very bad. Yes, if you have a collection, you MAY be able to have it removed from your reports without waiting 7 years. But it's not black and white.
Right, if you put down 50% they're not taking any risk on you! They'll foreclose at a profit! Regardless, name me a mortgage underwriter that will close your loan with an OPEN collection item and I'll be truly surprised. So if you've been thru this, who was your underwriter? (Not your broker..)
Risk profiles at a company like Amex are sophisticated. But you're somebody who apparently is sharing his high-earner status here, but you don't think that was an important caveat to your original post? It's like you're saying "CREDIT DOESNT MATTER*" and in fine print you're saying "if you have enough cash to put 50% down on things and have a high income!"
It's bad advice to give, which was my point, and one I'll standby. Nothing personal of course.
The only bad thing on my credit card report is a cable box that was not returned in a timely manner. The box was returned, and I even received my deposit back.
Despite filing disputes, it remains on my report as a $500 non-payment.
I have been able to get other items removed using your strategy but it doesn't always work.
If you get taken to collections over a trivial amount (<$100), its not into taken account for your credit score (latest FICO model fixed that).
Have to go to court for collections? The first words out of your mouth need to be, "Verify the debt." Ask them to produce the document you signed and agreed to. In the vast majority of cases, without this, your case will be dropped with prejudice. This is based on research I did while dealing with a personal mortgage "issue".
http://www.thisamericanlife.org/radio-archives/episode/532/m...