Fair Share and game theory

I've been grappling for the past few days with the idea of counselor vs. creditor. vs. client. A lot of observers of the debt recovery industry point to the funding relationship between creditors and credit counselors and think they smell a rat.

If the debt management plan returns money from the client to the creditor, they ask, then isn't it just debt collection? And if the counselor is funded with a percentage of the funds collected, aren't they just debt collectors?

No and no.

First, if any product that returns money from the debtor to the creditor is suspect, then what kind of debt recovery industry will we have? The only thing that rhetorical question allows for is bankruptcy, since chapter 7 is the only debt recovery method that doesn't involve paying back what you owe.

Clearly, there is a need for an industry that helps consumers resolve their debts short of filing bankruptcy. And yes, such an industry is necessarily going to return money to lenders. And duh, that's a good thing. What's an even better thing is that the lenders finance this industry because they like it when their debtors repay what they owe. Funding the counselor with a percentage of the funds collected rewards the agencies who are better at educating their clients and offer the best budget assistance. It punishes counselors who sign absolutely anyone on a debt management plan whether it's the right plan for them or not. It punishes counselors who can't help the client create an effective budget.

The central misconception that fair share critics make is assuming there has to be a winner and a loser. Not true. Credit counseling is not a zero-sum game. If the creditors get most of their money back, that doesn't make the debtors the losers. Everybody wins when debtors avoid bankruptcy, creditors get paid, and counselors are able to continue to educate and assist their clients. People who don't believe that have a neurotic hatred of creditors, and are rooting for the debtor to fail. They're cheering on bankruptcy. I find that creepy.

And I'm not saying bankruptcy is bad. It's an unfortunate necessity for a lot of people. But there are no winners in bankruptcy court, save the lawyers.

In debt recovery, the win-lose model plays out with traditional debt collections. "Pay us every dime you owe, or we'll destroy your credit." It's the collector's legal right to do that, but it's impossible to argue that the debtor "wins" in any real sense. Settlements can mitigate this, since the creditor or collector at least gets something, and the debtor gets a reduction in what they owe (and a dinged credit rating). One might argue that's a win-win of sorts, but it's certainly less than ideal.

All this is not to say that I support the creditors. I think people should generally repay what they owe. But the creditors are abusive, of both their borrowers and the credit counselors who endeavor to help those borrowers. Unfortunately, they use their funding as a cudgel to bring counselors into line, and create agreements with customers that give them unlimited power to assess fees, raise rates, and change loan terms at their whim. They grant credit indescriminately, then crush the lives of the debtor who can't repay. They're bad guys, these creditors. But there's no way for the borrower to 'win' against them, without being destroyed themselves.

The best solution is to not borrow. Only do business with lenders who treat you like a human being.

And the other thing that might help improve creditor behavior? Mandatory fair share.

Comments

[Alex]

Jeff, I just received a statement from my child's pediatrician's office. The statement is for services from February. This is the first statement that I have received for this visit and the amount due is already 31 to 60 days late. I'm meticulous about keeping credit bills and statements for about two years, especially medical bills because of the tax deduction for medical expenses. Seeing that the statement was already considered late, it made me interested to find out how many times I've been billed for medical expenses so long after the visit. I looked back and found that about 90% of my bills were either; billed before the insurance company had paid for the visit, making my bill/statement for the entire amount of the visit (which, of course, I had no intention of paying until insurance had paid their portion, making my amount due late by the next time the billing cycle had come around to find out my "real" amount due); or, billed thirty or more days after the visit, after insurance had paid (making my amount due fall in that "late" category). In every instance, I've found that I've never been charged a late fee or interest on the amount due although, by stated billing practice, I could have been.

This raises the question for me: How many of these collections/bankruptcies due to medical bills that we hear about are because of, what I would consider, sloppy billing practices used by the medical office or insurance company? Sure, I understand the huge emergency medical bills that have defaulted because of lack of insurance (I have a family member who works construction in that bind), but what about the people that have insurance but just don't understand the billing statements that they receive?

On an unrelated note, you might want to check out the article about Ray Zwego from Saturday's Kansas City Star, http://www.kansascity.com/105/story/62993.html. This is a great example of how the mortgage industry has screwed itself through funding sub-prime loans and mortgage fraud.

Alex

[Jeff Michael]

I'm moving this comment to it's own post so I can mull it over.