Consumer debt is "basically optional," but debt collectors rely on you not knowing that

Tech/finance wonk Patrick McKenzie, an advisor with such payment institutions as Stripe, runs a blog called Bits About Money, where he shares his far-ranging knowledge and perspectives on the machinery of money and law. In a recent post about credit card debt collection, McKenzie breaks down the complex scheming of the American debt collection industry, which — as he points out — relies almost entirely on threats of intimidation and the hope that you can be tricked into giving them money that they probably aren't entitled to and that you are probably not legally required to give them. Yes really: in most situations, you can just tell lender that you can't repay the money you borrowed, and the financial institution can just write that off as a business loss, and everyone moves on.

Or, I mean, they could do that. Or, as McKenzie explains, they could sell that debt for pennies on the dollar to a debt collector, who can use semi-legal or barely-legal methods to hound the shit out of you in hopes of getting you to pay literally amount of the debt back to them, so they can make a profit. From the essay:

The single most effective method for resolving debts is carefully sending a series of letters invoking one's rights under the Fair Debt Collection Practices Act of 1978 (and other legislation) to a debt collector who is operationally incapable of respecting those rights, then threatening them with legal or regulatory action when they inevitably infringe upon them in writing, leading to them abandoning further attempts at collection.

This effectively makes paying consumer debts basically optional in the United States, contingent on one being sufficiently organized and informed. That is likely a surprising result to many people. Is the financial industry unaware of this? Oh no. Issuing consumer debt is an enormously profitable business. The vast majority of consumers, including those with the socioeconomic wherewithal to walk away from their debts, feel themselves morally bound and pay as agreed.


The goal of [harassing calls from debt collectors] is to get a verbal promise to pay and payment credentials. […] Many promises to pay are not promises to pay in full, but rather "a plan" to pay the face value of the debt plus accumulated (and accumulating) interest over time. Most debtors who agree to payment plans will not successfully complete those plans. This is, from the perspective of a debt collector, not a problem. If they paid five cents on the dollar for your loan, and successfully convince you to pay twenty cents today and the balance over monthly payments over a year, you know what they're left with in month three when you default? Ability to collect from you again, or to sell your debt for more than they paid for it, because you are a better credit risk than most people in the portfolio. You proved that, by paying.

Essentially, these immoral, inethical debt collectors are banking (heh) on your moral and ethical obligations to repay your debts (because you've been raised in a society that has engrained that idea in your mind). And a willingness to respect that moral obligation — whether that's a decent credit score, or even a verbal promise that yes, you'll pay the money back — is an invitation for them to harass you even more. Because it means that you're an easy mark.

It's a long, long piece, but well worth reading.

Credit card debt collection [Patrick McKenzie / Bits About Money]