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Ownership of debt

November 12, 2020

Debt starts out very simply by borrowing money from a person or a company with a pledge of some kind to make repayment on agreed terms.  The terms (usually) include the principal amount, applicable fees, and interest payments.   The debt (promise to pay) is owned by the original lender unless they sell or assign, called subrogation, the debt to another entity.  There are lots of ways this can happen.

For consumers the most noticeable transfer of debt ownership is probably to third party collection agencies.  Some collections companies specialize in buying delinquent accounts for pennies on the dollar then aggressively collecting them.  Other collection agencies may work for the original lender and get paid a commission on the amount of money they collect.  While we have no data to report, anecdotally at least, it appears that the purchase and repurchase of debt seems to have become a more common practice.

It is not unusual for a bank or other institutional lender to sell debt to third parties who then resell to other third parties leaving the debtor uncertain of who owns the debt or who they should pay.  Although collection agencies are obligated to advise you that they are on the file, many collection notices go unopened and completely ignored.

Sometimes debt is traded on stock markets, mortgage debt for example – as explained in the movie “The Big Short”.  This debt is sold in blocs to, or through, investment companies and may form a part of your mutual fund portfolio – in essence you would then own your own debt.  Your mortgage may be a part of a bloc of bank mortgages that were sold to the company managing your mutual fund.

Regardless of who owns your debt, it must be disposed of in some way at some time.  The sooner the better, the longer it takes to repay debt the more fees and interest you will be subjected to.  Too much debt can be a financial trap for many people, and it is an easy trap to stumble into.  You may think you are in control as long as you haven’t missed any payments, and you may feel good about having a positive credit score.  But both of these senses could be completely misleading.

A positive credit score simply means that your bills are being paid in accordance with the terms of the debt.  A positive credit score does not, by itself, mean that you are eligible for more debt or that you are handling your debt well.  Similarly making regular payments does not, alone, mean you are in control – especially if you are only making minimum monthly payments.  You could be in debt forever, never able to repay the amounts you owe, having a great credit score and never being able to improve your financial life.

By contrast an insolvency proceeding may be the answer to bring about a meaningful resolution to long term, insidious debt.  A proposal can reduce the face value of the debt such that instead of being perpetually in debt, and unable to make further contributions to your retirement savings plan, you can become debt free and start living with less stress.  For more information call 519-646-2222