Opinion

Felix Salmon

When states don’t pay their debts

Felix Salmon
Jun 17, 2010 21:11 UTC

Greg Ip reports on how Illinois is going to have to start making unnecessary unemployment payments just because it’s refusing to pay its debts:

Illinois owes Shore Community Services, a non-profit agency in suburban Chicago, some $1.6m for services to the mentally disabled. The agency has had to lay off a dozen staff. Jerry Gulley, the executive director, says his outfit’s line of credit could be exhausted soon. The bank will not accept the state’s IOUs as collateral. “That’s how sad it is,” shrugs Mr Gulley.

Ip explained to me that these aren’t physical IOUs, like California issued, and they’re certainly not bonds — they’re just unpaid receivables. But even so, this is crazy: there’s no way that Illinois should allow the employees of a noble non-profit to be laid off just because it hasn’t got around to paying its bills. It’s the job of the state to encourage employment, not layoffs.

Other banks are reportedly accepting state receivables as collateral, but it seems to me that Illinois would do well to set up a formal system of paper IOUs, which would presumably be much easier to borrow against. More generally, I think that there’s a very good chance we’re going to see quite a lot of state-issued scrip in the years to come, not only from Illinois but also from other states with similar CDS spreads, like Portugal. As Ip notes, these states “do not issue their own currency, so inflating away their debt is not an option”. But issuing scrip is the next best thing.

The problem with states like Illinois, California, and New York is not the willingness of the executive branch to remain current on its debts; rather, it’s the ability of the legislative branch to make the kind of tough fiscal decisions which are politically dangerous. The more dysfunctional the state legislature — and all three of them are pretty gruesome in that regard — the more likely it is that the state treasury will find itself in a position of simply not being able to meet its contractual obligations as they come due.

Outright default on a state’s bonded debt is still unlikely:

The assumption of many investors is that the federal government would never let a state default. It might allow an isolated case, but if a default looked like the start of a wave, the federal government would surely blink—just as Europe did when confronted by Greece.

This is surely right, and I doubt that any state is going to attempt to pay its bond coupons in scrip. Everything else, however, is fair game — including payments for services to the mentally disabled.

COMMENT

This is a real problem, before retirement our company cleaned fleets of vehicles, and about 30% of our business was fleets owned by government agencies (all levels of government) and in the 80s, I cannot tell you how bad the receivables had gotten, 120-180 days out was common, it was a nightmare. Many small businesses think they are set to have government contracts, not so, you become their bank, and when they cut budgets or run out of money, you don’t get paid, it’s crazy. Most people don’t realize how they use the business community, state governments are the worst, your money comes out of another area or region usually, and they don’t care, and when they cut staff, they don’t return calls either.

Posted by LanceWinslow | Report as abusive

The sleazy world of predatory debt buyers

Felix Salmon
May 25, 2010 15:12 UTC

NEDAP has an extremely important new report on a particularly evil and sleazy part of the predatory financial universe: debt buyers. These institutions make hundreds of millions of dollars by suing people in low-income neighborhoods, often without properly serving them with notice that they’re being sued. When the alleged debtor doesn’t show up for court, the debt buyers get a default judgment, and start attaching bank accounts and garnishing wages. Often they do this successfully even when the debt is not legitimate.

The debt buyers are massively profitable, despite the fact that they have almost no legal leg to stand on:

When debt buyers purchase debts, they become legal owners of those debts, but obtain very little information about them. Debt buyers usually receive an electronic file that includes only a person’s name and social security number, last known address, the amount allegedly owed, the charge-off date, and the date and amount of the last payment. The portfolio does not include documentation of the debt, such as the governing contracts and account statements. This information is insufficient to ensure that the debt buyers collect the correct amount from the correct person. Debt portfolios are regularly sold on an “as is” basis, without consideration for whether collection of the debts in the portfolio is legal.

Debt buyers’ ability to obtain additional documentation from the original creditor is extremely limited: they may purchase the right to request such documentation in a limited number of cases, or they may not have access to any supporting documentation at all. If the debt is resold to another debt buyer, obtaining such documentation becomes even more difficult, as most second and subsequent sales of debt portfolios do not include any direct access to the additional documentation from the original creditor, which means that those debt buyers almost certainly lack the documentation needed to support lawsuits filed against people whose names appear in their portfolios.

The report makes a number of very sensible recommendations, including a ban on debt buyers filing lawsuits if they don’t have any evidence which proves the debt is owed. More generally, something has to be done to rectify the enormous asymmetry in sophistication and legal ability between the two sides here: as the report says, “many people sued are pressured into unfair and unaffordable settlements that leave them in a worse position than if they had ignored the lawsuits”.

This entire industry couldn’t exist, of course, if it wasn’t for the banks, which tacitly condone this behavior by selling debt buyers utter garbage debt. So while going after the debt buyers themselves is obviously the first order of business, it’s also worth putting pressure on the banks to stop dealing with them. I wonder which bank might like to be first in denouncing these gruesome parasites.

Update: I should add that the report was not just the work of NEDAP: it was co-written with the Urban Justice Center, with help from attorneys at the Legal Aid Society and MYF Legal Services.

COMMENT

Federated Capital has sued me and got a (Fraudulent Appraisal of over $28K for the alleged debt) Summary Judgment for the paper thay paid peanuts for. They were made aware that I am Judgment Free, yet they plunged on. I appealed the canned junkdebt lawyer crap they used and the appeals court ruled in my favor. FedCaps attorney offered to settle for $2500. Shows you what they have in it including fees for their attorney. I am pressing on with jury trial. These people don’t even try to collect on their judgments, they have been Frauduently Appraised and inflated the victims cant pay and never will some have left the county. Why do they spend time on this? Could it be that they like the recent mortgage scammers are packaging and selling theses fraudulently apprasied judgments to unsuspecting dips here and overseas? I have stated so in my briefs to Appeals and lower court so it is in the on line record for all to see and I have reported to securities and exchange. This will be the next mortgage melt down.

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