Buying Debt as Effective Altruism?

The argument for microlending is "access to credit allows people to invest in themselves and their business, but the cost for interacting with people on the $100 level is such that it eats any profit, making banks uninterested." Thus, the service can be run primarily as a nonprofit, or by offloading some of the administrative work and risk to the borrowers (i.e. the lending circle idea).

I was struck by the lopsidedness of the figures.

That's because the market expected that the net return on the debt would be about 3%. So it might look like you're saving people from $80,000 of heartache, but you're only actually increasing their financial prospects by about the $2,300 you transferred to them. Yes, they don't get called by debt collectors, and yes, they don't go bankrupt- but artificially inflating someone else's creditworthiness is a problem for them and everyone else. It doesn't seem like you could get more than $2,300 out of them long-run, because otherwise the debt collection companies would be able to get more out of them!

But the thing about personal debt is that, thanks to interest payments and stress, it prevents people with high earning potential (compared to an average African) from making decisions that would optimal were they debt-free--like finishing college or buying a used car so they can take on a higher-paying job.

Or... taking out more debt!

The group is able to buy debt so cheaply due to the nature of the "secondary debt market". If individuals consistently fail to pay bills from credit cards, loans, or medical insurance the bank or lender that issued the funds will eventually cut its losses by selling that debt to a third party. These sales occur for a fraction of the debt’s true values – typically for five cents on the dollar – and debt-buying companies then attempt to recoup the debt from the individual debtor and thus make a profit.

For the same reasons that no one wanted to buy the debt for 13 million dollars, that apparent 13.6 million dollar "profit" is largely imaginary. Debts that are unlikely to ever actually be repaid and so forth. There's probably some profit to the system in terms of administration and debt collection that goes unhandled but that's really charity for the previous debt owning institution than it is to the people who are in debt. As you noticed, people who are good investments (eg likely to pay off their debts and then be profitable) are not going to have debt that cheap.

On the whole this seems strictly worse than well-aimed scholarships.

Are there any other obstacles you all can think of?

At least within the United States, forgiving debt counts as a taxable event, on the year that the event occurs. This Occupy group has largely sidestepped the issue, and the IRS is unlikely to audit the beneficiaries in this particular case, but the larger the system becomes and the longer-term the system becomes the more likely your patrons will be looked at.. If you're not very careful about how you build the forgiveness, this can even push people into higher tax brackets or out of welfare benefits that they need to live. See some criticism of the Bush-Income-Based-Repayment plan for details on this matter.

Debt collection companies are also likely to adjust the cost of debt around your purchasing power, if your charity persists for long, which may slightly decrease the rate of return. ((Contrawise, there are reasons to keep uncollectable debt on your own books, even if it's obviously uncollectable, due to current accounting practices.))

To expand on your point four, the debt is valued at less than its paper number because these people are the ones that are generally hardest to discuss matters with and/or get money from. This may not always be a matter of income, but a matter of the people not having reliable contact information or living in areas where the courts tend to be very suspicious of debt contracts. Garnishing someone's wages involves drastically different costs depending on your state.

You'd also need to get a fairly good rate of return for this to be the more efficient than typical investment strategies. If eliminating the debt it itself a value thing, that's less of an issue, but it'd be tricky to evaluate that. If you want too much of someone's future wages, they're likely to discount opportunities to increase their future wages (especially due to how marginal tax rates go around the poverty line to four-time the poverty line).

Seems like the only difference between buying someone's debt and paying it off for them vs them just defaulting is that if they just default, their credit rating takes a hit. So it seems like the major side effect of this scheme would be to make credit ratings less reliable.

freeing people with good prospects from debt in exchange for their signing a contract to donate a small portion of their future salary to charity?

So, let's see.

First you need to identify people who defaulted on their debt payments. This is easy.

Second, you need to filter them and select "people with good prospects". This is considerably harder. I am not even sure what does that mean. Presumably you'll ignore the credit card debts of a black single mother of nine kids but will buy the student debts of white suburban girls graduating from college?

Third, what you are doing, in economic terms, is refinancing their debt. You give them the lump sum now in exchange for a promise of a series of payments later. That's just a normal loan transaction. What makes it special -- that you will be willing to loan money on favorable terms to people already in default? Well, I guess, but that doesn't strike me as particularly effective or increasing "the world's productivity in the long run".

Interesting thought. What metrics does this improve more than deworming or mosquito nets? If your goal is something like "increase area under the curve of "expressed IQ of humanity", this does some good. I suspect it does less overall good, but it moves a different part of the curve than the very basic life-giving charities do.

I suspect it also has some negative effects (like encouraging less debt forgiveness/reduction than might otherwise occur: if there are charities that buy debt for more than it could be sold to vulture collectors for, that raises the overall value of creating and holding this kind of debt.)

This is similar to the idea of paying for a student's college education in return for a percentage of their future earnings. Word on the street is that this is impossible because slavery is not legal. I don't know if that's true, but I do know people keep reinventing that idea, and no one has ever made it work in America.

It would create a moral hazard: people would be more willing to take high risk loans if they can expect to pass this risk to your charity.

Wouldn't that kind of contract qualify as illegal indentured servitude?

otherwise render them bankrupt

You say this as if it's kind of like death. But instead it mostly means you go through a stressful ordeal where you lose most of your assets, debts go away, and no one will lend to you for seven years.

Sort of a macarthur "genius" prize for people who are not geniuses. Interesting.