Downside of the Rolling Jubilee

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As a media-savvy ploy to shift public opinion on the debt problem, the Rolling Jubilee may be a brilliant PR move. It's probably not much real help for debtors. (See also: How Debt Fools People)

Are you familiar with the Rolling Jubilee? What they do is use donations to buy up distressed debt for pennies on the dollar, then forgive the debt and send the debtor a letter telling him how to get started cleaning up his credit rating.

As public relations, this is brilliant. It highlights the way lenders and collection agencies swap these debts around for pennies on the dollar — but won't let the debtor pay it off for pennies on the dollar. It also engages the public in a discussion on the unfairness of our current system of debt and the crushing burden weighing down the poor, the sick, the young, the troubled, and the merely unlucky.

As a way of actually relieving debt for actual people, it doesn't do much.

Too Little Help for Too Few People

Any debt that can be bought up for pennies on the dollar is debt that was already long ago written off as uncollectable.

That doesn't mean it's not a problem for the debtor. The debt's presence on their credit report probably makes it impossible for the debtor to ever get their finances cleaned up. It doesn't just make it impossible to borrow money; it makes it tougher to find a place to live, find a job, get insurance, even open a bank account. (If that last applies to you, check out my posts New Tools for the Unbanked and Making Direct Deposit Safe for the Garnished.)

It does mean it probably isn't the debtor's biggest problem. Forgiving $1,100 originally charged on some credit card is great, but it does nothing to keep the electricity turned on or stave off foreclosure or cover the health insurance bill.

So from the debtor's perspective, it's more a tease than actual help. "Oh joy! Kind strangers have swooped in and solved my eleventh most pressing problem!"

It also helps too few people for the debt reduction to have any societal effect. A really sweeping reduction in the amount of debt that all heavily indebted people owed would change the whole economy, unleashing all sorts of activity from people previously trapped by debt. (Unleashing spending, of course, but not just that. It would also free people to be more entrepreneurial, if they didn't have the relentless burden of monthly payments.)

Pernicious Effect on Debt Value

This, I think, is where the Rolling Jubilee does real harm.

A lot of the debt that has gone into collections isn't even owed. This can happen a lot of different ways:

• A legitimate debt was paid in full, but is still on the books due to an error by the lender.
   
• Debt that was illegitimate from the start, such as money borrowed by an identity thief.
   
• The lender has gotten confused about who owes the money and is dunning the wrong person.
   
• The debt was discharged in bankruptcy.
   
• The debt is disputed, such as when a shoddy product is returned, but the seller refused to credit the account.
   
• The underlying debt is a trivial amount — a $10 late fee — but has blown up to a large sum due to additional fees and penalty interest rates.

Most of those cases could be sorted out if the borrower (or supposed borrower) knew their rights. Most could be ended with a simple letter along the lines of, "I don't owe that money. Either send me proof that I'm wrong or quit bugging me." Sadly, too many borrowers don't know their rights with regard to disputed debts.

The problem is, even bogus and disputed debts like these have some value on the secondary market. Debt collectors on the sleazier end of the business will buy debts for, let's say, 5 cents on the dollar. Then they badger the supposed borrowers, trying to get blood out of a stone. If the collection agency can collect 10 cents on the dollar, they're making real money.

Once they've gotten what money they can, they'll sell everything on to some even sleazier agency.

The danger I see is this — if the Rolling Jubilee will pay cash for these debts — especially if they're buying the cheapest ones they can find — they're rewarding the very people who keep selling on the illegitimate debts. That makes it worth keeping the fake debt — debt nobody actually owes — on the books.

Anything that makes it more profitable to be sloppy about keeping track of who does and doesn't owe you money is a bad thing.

Still Probably a Positive Force

Despite the fact that the movement will do little good for real debtors, and will do some real harm (by inflating the value of fake debts), I think on balance the Rolling Jubilee is a good thing.

I don't expect it will get big enough to be a real factor in the debt market, so the real harm is as limited as the real good it might do. But just by existing, it is advancing the discussion on how our society handles debt. That's a big win.