Monday, June 14, 2010

Debtors' Prison, 2010 Version

Police now works for the debt collectors. Star Tribune of Minneapolis-St Paul reports:

In jail for being in debt

"You committed no crime, but an officer is knocking on your door. More Minnesotans are surprised to find themselves being locked up over debts.

"...It's not a crime to owe money, and debtors' prisons were abolished in the United States in the 19th century. But people are routinely being thrown in jail for failing to pay debts. In Minnesota, which has some of the most creditor-friendly laws in the country, the use of arrest warrants against debtors has jumped 60 percent over the past four years, with 845 cases in 2009, a Star Tribune analysis of state court data has found.

"...Whether a debtor is locked up depends largely on where the person lives, because enforcement is inconsistent from state to state, and even county to county.

"In Illinois and southwest Indiana, some judges jail debtors for missing court-ordered debt payments. In extreme cases, people stay in jail until they raise a minimum payment. In January, a judge sentenced a Kenney, Ill., man "to indefinite incarceration" until he came up with $300 toward a lumber yard debt.

""The law enforcement system has unwittingly become a tool of the debt collectors," said Michael Kinkley, an attorney in Spokane, Wash., who has represented arrested debtors. "The debt collectors are abusing the system and intimidating people, and law enforcement is going along with it."

"How often are debtors arrested across the country? No one can say. No national statistics are kept, and the practice is largely unnoticed outside legal circles. "My suspicion is the debt collection industry does not want the world to know these arrests are happening, because the practice would be widely condemned," said Robert Hobbs, deputy director of the National Consumer Law Center in Boston."

"...The laws allowing for the arrest of someone for an unpaid debt are not new.

"What is new is the rise of well-funded, aggressive and centralized collection firms, in many cases run by attorneys, that buy up unpaid debt and use the courts to collect." [Emphasis is mine. The article continues.]

It looks like 'ambulance chasers' have found a more secure, if less lucrative, line of business.

These collection firms are not much different in what they do from high-flying hedge funds like Paulson & Co. They buy distressed assets from the banks (credit card debt for the former, residential mortgages for the latter) at a huge discount. Now it is up to them to collect more than the discounted amount that they pay to the banks.

Hedge funds and wealthy investors who purchase discounted mortgages have the US government (i.e. taxpayers) as backstop. The debt is secured by the property.

Unlike mortgage debt, credit card debt is unsecured. So the new owners of this debt have to be aggressive if they want to maximize their return on the investment. That's where the police and the court system come in. Instead of protecting citizens from predatory firms who abuse the public justice system to increase their profits, the system works for these firms.

You think Chris "Friend of Angelo" Dodd's so-called financial 'reform' bill has anything to say about this new breed debt collectors and to actually protect consumers?

As for the banks who sell distressed/delinquent unsecured debts to these collection firms (Bank of America, Chase, Citigroup, etc.), they have nothing to complain, as far as I'm concerned. They issued those unsecured credits; no one compelled them to. They simply created 'money' from thin air, and put the digits in the borrowers' accounts. It cost them zero to create the money. On their balance sheets they recorded them as 'assets' (magic of fractional-reserve banking), so when they write them down the balance sheets get hit. So what? It still didn't cost them anything, they got some money when they sold these assets to debt collectors, and they have the government backstop.


Anonymous said...

Thats pretty amazing that state and local gov'ts have spare cash to house and feed these people. I believe the cost to hold someone in jail or prison for a year is about $30K to $40K.

In 19th Century debtor prisons, the prisoners were forced to work to repay there debt and pay for their incarceration costs. Since there is no profit for the gov't to hold debtors, I doubt this policy will last very long.

arevamirpal::laprimavera said...

Maybe they get personal kickbacks from the new breed of collection firms. Dump the cost of jailing people on to the public, they pocket the gain. Just like Wall Street did and still doing.

It just annoys me to no end that these judges, police, will retire with fat pensions, courtesy of taxpayers. Public employee millionaires.

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