This morning, I was writing a post about Grexit fears and ended up on Fusion.net by way of distraction.

And then I found their interactive game: Bad Paper.

The Other Side Of Debt Collection

The right to someone’s money is something that we should be quite familiar with. But the thing is, we’re usually only familiar with the first part – the borrowing.

But speaking as someone who has occasionally ventured into this area, I’d like to point a few things out.

The world is split into three kinds of people:

1. People who pay their bills when they fall due;
2. People who chance it, but will pay when pressed (or, to give them the benefit of doubt, they just “forgot” and/or were waiting for someone else to pay them and “these people, amirite?“)
3. People who promise payment and promise payment, and then disappear.

When you sit on the side of collection, you’re grateful for the first kind, irritated by the second, and thoroughly thoroughly frustrated by the third.

The trouble is, often, you can’t tell the difference between the chancers and the ne’er-do-wells until you’re quite far down the path of irritation.

Fortunately, in the world of finance, there is a solution: you can always pay someone to do the job for you. And by that, what I mean is:

1. You can sell someone the right to collect that debt.
2. You’d sell it to them for a discount.
3. That “discount” is effectively the collection fee.

For example, let’s say that John owes me R1,000 and he’s becoming a frustration. Getting rid of that frustration will be worth something to me. In fact, I’d happily just take R800 and call it quits. So I go to my debt collector and offer to sell him the right to collect R1,000 for R800. That’s a R200 discount – giving him the option to earn a 25% return on his investment.

So far, so good.

But then let’s say that the debt collector is also frustrated by John, so he goes and sells the right to collect R1,000 for R600 to debt collector 2, who is perhaps a bit less legitimate than debt collector 1.

Then debt collector 2 has no luck, and he sells the right to collect R1,000 for R400 to debt collector 3.

As you progress down the path of debt selling, the right to collect R1,000 gets cheaper and cheaper.

But the flipside of this is that the upside gets progressively more enticing. Imagine buying the right to collect R1,000 for only R10? Even a small payment toward the debt from John is likely to get you all your money back.

And now you’re in the dark side. Because this is where debt collection is essentially being sold to gamblers and the mafioso, who are all about the cheap buy-in and the giant upside and the suing-and-or-knee-cap threats. They’ll settle for payments of R25 per month indefinitely. Because that’s basically money for free.

Also, by this point, you’re so far down the debt collection chain that who knows if the debts are even legitimate – and, to be honest, do the debt collectors really care?

Which is where this game came in.

Things I Learned While Playing Bad Paper

1. Always show up in court. If you don’t show up, the judge tends to grant a default judgment in favour of the debt collector. That’s bad for you, because it just made the debt legitimate.
2. Always ask for proof of your debt. Banks lose the paper trail just because. Do you really think that the debt collector has all their paperwork in order?
3. If I were a debt collector, I’d probably collect.
4. If I were a debt, I’d almost certainly be collected in some shape or form.

There’s also an accompanying article which is worth a read.

Fun.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.