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Old 14th May 2019, 05:14 AM   #1
lionking
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Banks settling unsecured loans for a big loss

A fairly dead part of the forum I know, but I want to share an interesting experience.

One of my daughters took out a loan with a major Australian bank (NAB) mainly to buy a car, but it increased for holidays and so on. Not my most money conscious child.

Anyway she has a $38k debt. Her bank has just offered to settle it for $12k. She has asked me to come up with this amount, which I will - on the condition we enter into a legal agreement she pays it back within 12 months, which she agrees to. Pretty harsh having a legal agreement with a child, but still.

The bank’s new position (after recent government enquiries) is that unsecured loans are poison and they want to get what they can out of them. But excusing $26k of a debt? Well yes. I have it in writing.

Anyone come across anything like this before?
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Old 14th May 2019, 05:17 AM   #2
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Originally Posted by lionking View Post
A fairly dead part of the forum I know
BWAAH!!

The hell, man? Don't sneak up on me like that!
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Old 14th May 2019, 06:28 AM   #3
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I've come across something like it quite a bit, actually. In the sense of having more than once had to settle with a creditor for some (substantial) fraction of the full amount owed.

I expect in this case the bank is looking at the overall risk-profit balance of the entire unsecured loan portfolio, and deciding that the portfolio as a whole doesn't make good business sense. So they're settling with each borrower in a way that tries to balance prompt results with minimal losses.

Basically they're buying time with money. Getting this done quickly seems to be worth a lot.
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Old 14th May 2019, 06:38 AM   #4
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It's not as bad a deal for the bank as it seems. As already mentioned, there is the risk profile; if the debitor settles now, it is suddenly safe money. That accounts for a lot.

Then there is NPV. Money today are more valuable than money in x years, especially if there is a real risk that x could turn out to be infinite for some of the debitors.

It is generally a good business strategy to cut your losses and move on.

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Old 14th May 2019, 07:54 AM   #5
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It's not uncommon. These sorts of loans are, as the bank said, poison; they're uneconomic to recover and a PR nightmare.
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Old 14th May 2019, 08:00 AM   #6
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I guess the big question is why the bank decided to get into the unsecured loan business in the first place.
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Old 14th May 2019, 08:49 AM   #7
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Originally Posted by theprestige View Post
I guess the big question is why the bank decided to get into the unsecured loan business in the first place.
The big question is what do the bank know about Lionking's daughter's creditworthiness which Lionking is about to find out.
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Old 14th May 2019, 08:56 AM   #8
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Car loans in Australia are unsecured?? In the USA if you don't pay your car loan, they come and take your car. Or did she take an unsecured (personal) loan to buy a car?
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Old 14th May 2019, 09:02 AM   #9
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Originally Posted by Jack by the hedge View Post
The big question is what do the bank know about Lionking's daughter's creditworthiness which Lionking is about to find out. : )
Heh. It sounds like lionking has already figured it out.
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Old 14th May 2019, 09:06 AM   #10
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Originally Posted by lionking View Post
A fairly dead part of the forum I know, but I want to share an interesting experience.

One of my daughters took out a loan with a major Australian bank (NAB) mainly to buy a car, but it increased for holidays and so on. Not my most money conscious child.

Anyway she has a $38k debt. Her bank has just offered to settle it for $12k. She has asked me to come up with this amount, which I will - on the condition we enter into a legal agreement she pays it back within 12 months, which she agrees to. Pretty harsh having a legal agreement with a child, but still.

The bank’s new position (after recent government enquiries) is that unsecured loans are poison and they want to get what they can out of them. But excusing $26k of a debt? Well yes. I have it in writing.

Anyone come across anything like this before?
USAsian here, but banks will often accept an offer in compromise to settle an unsecured debt. I'm guessing that a fraction of something beats a full debt default.
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Old 14th May 2019, 09:14 AM   #11
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Other have pointed out the big reasons this is not so bad for the bank, but there are also a couple of minor reasons that come into play.

Depending on her interest rate and how long she has been paying, this may actually represent a positive rate of return. Not the same rate of return they negotiated, but not negative, or if negative, not as negative as it appears on the surface.

Also, servicing a loan costs money. There are administrative costs to sending out statements, collecting payment and such. If the borrower is often late or doesn't pay the full payment amount every month, then that creates even more administrative costs. If the borrower calls to complain about late fees or argue for extensions, you get the idea. Cutting those costs can be a real saving when extrapolated across an entire portfolio of loans.

As to why they got into such loans in the first place: that VP isn't here anymore. Institutions change strategy when they see a strategy is not bringing the desired results. Nothing all that surprising about that.
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Old 14th May 2019, 09:22 AM   #12
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Originally Posted by lionking View Post
A fairly dead part of the forum I know, but I want to share an interesting experience.

One of my daughters took out a loan with a major Australian bank (NAB) mainly to buy a car, but it increased for holidays and so on. Not my most money conscious child.

Anyway she has a $38k debt. Her bank has just offered to settle it for $12k. She has asked me to come up with this amount, which I will - on the condition we enter into a legal agreement she pays it back within 12 months, which she agrees to. Pretty harsh having a legal agreement with a child, but still.

The bank’s new position (after recent government enquiries) is that unsecured loans are poison and they want to get what they can out of them. But excusing $26k of a debt? Well yes. I have it in writing.

Anyone come across anything like this before?
They're just cutting out the middle man. It saves them having to sell the debt to some rancid debt collection agency
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Old 14th May 2019, 09:51 AM   #13
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Originally Posted by 3point14 View Post
They're just cutting out the middle man. It saves them having to sell the debt to some rancid debt collection agency
12k is probably more than they could get from said rancid debt collection agency.
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Old 14th May 2019, 11:17 AM   #14
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Originally Posted by Jack by the hedge View Post
The big question is what do the bank know about Lionking's daughter's creditworthiness which Lionking is about to find out.
Oh, there’s no doubt the bank knows about my daughter’s saving history and figured that it was best to get what they can now.

Interestingly, she asked how this would effect her ability to borrow in the future. Her bank said it would as far as they are concerned, but her credit record would show the loan as paid, and it would increase her actual credit rating.
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Old 14th May 2019, 11:28 AM   #15
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Originally Posted by lionking View Post
Oh, there’s no doubt the bank knows about my daughter’s saving history and figured that it was best to get what they can now.

Interestingly, she asked how this would effect her ability to borrow in the future. Her bank said it would as far as they are concerned, but her credit record would show the loan as paid, and it would increase her actual credit rating.
Good lord, I wish I could take out a loan from NAB.
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Old 14th May 2019, 11:33 AM   #16
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Originally Posted by Jack by the hedge View Post
The big question is what do the bank know about Lionking's daughter's creditworthiness which Lionking is about to find out.
Well, some years ago, such loans were all the rage in the banking business: The interest rates are high to very high ... to outrageous, and with a booming economy, most could eventually pay up.

....

Then came crisis. Now, you might think banking people could have foreseen that, but hey .... they are just humans. So now, such loans have changed from great business to ... poison. So, sober business thinking sets in, and they are unloaded, costs consolidated, and ... we move on. .... Again.

Hans
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Old 14th May 2019, 11:35 AM   #17
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Maybe the Post Office can take over the unsecured loan business from private banks.
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Old 14th May 2019, 11:37 AM   #18
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Originally Posted by MRC_Hans View Post
Well, some years ago, such loans were all the rage in the banking business: The interest rates are high to very high ... to outrageous, and with a booming economy, most could eventually pay up.

....

Then came crisis. Now, you might think banking people could have foreseen that, but hey .... they are just humans. So now, such loans have changed from great business to ... poison. So, sober business thinking sets in, and they are unloaded, costs consolidated, and ... we move on. .... Again.
I'm not sure I see the problem. This seems like a win-win for everyone. The bank gets into the market when it's profitable, and as the market dwindles and the profits start to dry up, they stop issuing new loans and start buying out their remaining debtors.
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Old 14th May 2019, 12:02 PM   #19
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US bankruptcy attorney here. I see it all the time. As previously mentioned, some of these loans are very high interest and the original loan amount (excluding accrued interest) may have already been nearly paid and then a settlement offer made for a pittance compared to the current loan balance. Well, the company may view that portfolio as a bad debt. To sell t off as a portfolio normally means 3-5% of the value. Settling seems good. Pushing a credit risky debtor too far may result in a bankruptcy filing and an even worse situation than the others.

Really, its all about risk assessment. Sometimes the creditors get it right and oftentimes they do not.
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Old 14th May 2019, 12:19 PM   #20
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Originally Posted by lobosrul5 View Post
12k is probably more than they could get from said rancid debt collection agency.
I was wondering how much of what they'd have got elsewhere it would cover. I have no clue what rates outstanding debts are paid at. Thanks.
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Old 14th May 2019, 12:23 PM   #21
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Originally Posted by 3point14 View Post
I was wondering how much of what they'd have got elsewhere it would cover. I have no clue what rates outstanding debts are paid at. Thanks.
Oh I don't know the rates either, certainly not in Australia. But I can't imagine the bank letting her settle for 12k when they could've gotten more from a collections agency, just out of the goodness of their hearts.
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Old 14th May 2019, 12:27 PM   #22
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Originally Posted by lionking View Post
She has asked me to come up with this amount, which I will - on the condition we enter into a legal agreement she pays it back within 12 months, which she agrees to.
Does the agreement include an enforceable penalty for non-payment? Without that it might only be a symbolic gesture.
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Old 14th May 2019, 12:35 PM   #23
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Originally Posted by lobosrul5 View Post
Oh I don't know the rates either, certainly not in Australia. But I can't imagine the bank letting her settle for 12k when they could've gotten more from a collections agency, just out of the goodness of their hearts.
Ah, well, I'll go back to this that came after yours (heavily edited):


Originally Posted by Crawtator View Post
US bankruptcy attorney here....To sell t off as a portfolio normally means 3-5% of the value.
I had no idea it was that little.
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Old 14th May 2019, 01:15 PM   #24
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Originally Posted by 3point14 View Post
Ah, well, I'll go back to this that came after yours (heavily edited):




I had no idea it was that little.
Many times, the portfolio is evaluated as a whole to determine what the collection rate might be. Let's consider the OP's scenario: unsecured loans. Well, the default rate on these loans is rather high at between 3-4% (depends highly on your state and source material). Next, the point of default is important when figuring out how much the debt-purchaser is willing to pay. For an older portfolio, the amount to be paid is obviously going to be a lot lower. Fun fact: deaths really do contribute considerably to collection rates. Also, a certain percentage of the debtors will invariably moved onto other, non-garnishable sources of income such as social security. All these factors must be analyzed as a subset of not just the population as a whole, but also the general geographic region that is typical clientele of the creditor.

TLDR - it can be very complicated to find the right algorithms to insure that a debt-buyer won't be losing their ass with the purchase of a portfolio. To cover it's rear, it will be damn sure to build in a pretty hefty potential profit margin to do so. But don't worry. On these older loans, the debt-seller probably hasn't lost money due to previous payments on interest and principle, but probably has a pretty hefty sunk cost if they choose to sell the portfolio at that low of a rate.
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Old 14th May 2019, 01:23 PM   #25
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Originally Posted by lionking View Post
Anyone come across anything like this before?
Very common, and even more so in the 21st century.

Logic used to be that the lender works with the borrower to get full repayment, no matter how long it takes.

Now, once a debt is 180 days in arrears it gets sold to a vulture operation for 10% of face value. Turning liabilities into losses makes no difference to the banks and cuts administration costs.

I once negotiated $200,000 of debt down to $20,000 for a guy who was in the crap. A lawyer friend of mine has one where he negotiated a payout of 3 cents in the dollar, so 10c wasn't even that wonderful.

Banks like to crystallise losses so they know how much to put fees up next year.
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Old 14th May 2019, 01:37 PM   #26
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What is interesting is that my daughter has been paying off the loan.

I think one issue unique to Australia is that our banks have just undergone a Banking Royal Commission which was a shattering blow to their reputations. I suspect that part of their reasoning (apart from the other reasons provided in this thread) is that they don’t want to even think about bankrupting someone without any real assets.

My daughter has sworn that her and her partner now have the opportunity to save (after paying off dad) and can now foresee buying a house. She couldn’t hope for that with the debt over her head.

Thanks for the comments so far. I had no idea this practice was so widespread.
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Old 14th May 2019, 01:45 PM   #27
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Originally Posted by theprestige View Post
I'm not sure I see the problem. This seems like a win-win for everyone. The bank gets into the market when it's profitable, and as the market dwindles and the profits start to dry up, they stop issuing new loans and start buying out their remaining debtors.

Oh, it isn't a big problem. Just optimizing profits, according to the situation.

Hans
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Old 14th May 2019, 02:00 PM   #28
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Happy coincidence - I have a company that owed me $560, inc tax. I've been chasing them for a month and if I send it to a debt collector it's going to cost me $200, if I get it back.

I sent a note to the owner yesterday telling him that if he paid me $300 by this morning, I'd call it quits.

I just checked the bank and there's his $300 in there.
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Old 15th May 2019, 06:48 AM   #29
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Colour me surprised if a bank just went out and offered a substantial write-off of a loan that wasn't at all delinquent (IE an asset of the bank's that was performing fine).

Unless it was a regulation or reputation-influenced strategy change to shrink that type of business, which it seems could be the case.

Personal loans that are not asset-backed and are from institutional lenders can charge anything from 5% to 30% with, I think, most of the action in the mid-teens. At that interest rate, then agreeing with some stuff above such a loan can be positive NPV even if it defaults completely after a few years.
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Old 15th May 2019, 07:09 AM   #30
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Just be aware that debt forgiveness, at least in the US, is taxable income. $26,000 at whatever her income tax rate is can leave a pretty hefty bill come tax time.

“Hey Dad? About that $12,000. I think I need a little more.” 30%’ish? Another $8,000 or so should do it.
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Old 15th May 2019, 07:13 AM   #31
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Right. Meet the new creditor, bigger and badder and bully-er than the old one. The lending bank gets a similar "correction" in the form of tax relief on its charge-off

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Old 15th May 2019, 11:41 AM   #32
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Originally Posted by Francesca R View Post
Unless it was a regulation or reputation-influenced strategy change to shrink that type of business, which it seems could be the case.
I'm pretty confident it's neither of those.

There haven't been any regulatory changes, and while banks would prefer unsecured borrowers go to loan sharks, they still do unsecured loans. DINKS are good business.

It all makes me remember fondly the mid-1980s, when ANZ Bank had an unsecured loan of $10,000,000 to a well-known businessman.
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Old 15th May 2019, 12:27 PM   #33
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Originally Posted by Spock Jenkins View Post
Just be aware that debt forgiveness, at least in the US, is taxable income. $26,000 at whatever her income tax rate is can leave a pretty hefty bill come tax time.

“Hey Dad? About that $12,000. I think I need a little more.” 30%’ish? Another $8,000 or so should do it.
Oh Christ. Need to check this.
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Old 15th May 2019, 12:32 PM   #34
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Before you pay, negotiate what they will report to Trans Credit (etc) ... it's possible to get them NOT to report the loss at all ... and keep her credit report good.

After all ... if they are going to trash her credit report, she could just go bankrupt and pay NOHING back to them.
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Old 15th May 2019, 01:22 PM   #35
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Tax issues surrounding “debt forgiveness” are too complicated for me. When I thought about it, if the creditor gets a tax deduction for forgiving the debt, it makes sense that there is some offset. I have asked my daughter to talk to her accountant. Thanks for the heads up Spock.
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Old 15th May 2019, 01:25 PM   #36
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Originally Posted by Ron Swanson View Post
Before you pay, negotiate what they will report to Trans Credit (etc) ... it's possible to get them NOT to report the loss at all ... and keep her credit report good.

After all ... if they are going to trash her credit report, she could just go bankrupt and pay NOHING back to them.
My daughter has it in writing that it will not effect her credit rating. In the past, these arrangements were listed as “settled”. Now they are listed as “paid”. The bank knows, of course, but other entities do not.
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Old 15th May 2019, 01:46 PM   #37
Francesca R
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Originally Posted by lionking View Post
Tax issues surrounding “debt forgiveness” are too complicated for me. When I thought about it, if the creditor gets a tax deduction for forgiving the debt, it makes sense that there is some offset. I have asked my daughter to talk to her accountant. Thanks for the heads up Spock.
It almost always applies to business. Individuals not always. If Australia has gift or transfer taxes then it's more likely that debt writedown is taxable too, otherwise it's a handy dodge to avoid the former. If not then you may be OK. Somebody will tell you for free.
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Old 15th May 2019, 01:52 PM   #38
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My Googlefu told me that it’s treated as a Capital Gain, which is taxed at ordinary income rates in AU. But I didn’t spend much time on it. Seemed to be some chatter about exceptions.
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Old 15th May 2019, 02:51 PM   #39
lionking
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Originally Posted by Spock Jenkins View Post
My Googlefu told me that it’s treated as a Capital Gain, which is taxed at ordinary income rates in AU. But I didn’t spend much time on it. Seemed to be some chatter about exceptions.
It looks like it won’t have a major impact. Both my daughter and I work for the same company which has full charitable status. We “salary sacrifice” much of our income, which leads to low income taxes. If she puts the debt forgiveness amount into salary sacrifice, it shouldn’t be too bad.
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Old 16th May 2019, 02:57 AM   #40
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Originally Posted by 3point14 View Post
They're just cutting out the middle man. It saves them having to sell the debt to some rancid debt collection agency
Originally Posted by lobosrul5 View Post
12k is probably more than they could get from said rancid debt collection agency.
Yep. Otherwise it's easier to just sell it to a debt collector.
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