That seems simple and fair at first, but I think it actually creates more problems than it solves.
First, you get a horrible incentive to not repay debts:
1. A relatively innocent and good-natured Bank lends a jerk $1.00
2. The jerk refuses to pay it back, knowing the bank can't transfer it to someone who isn't a pushover without giving him a steeply-discounted offer first
3. In response all loan requirements and interest rates rise for everybody
Secondly, it fucks up the negotiations, because would-be buyers can infer something when the creditor doesn't snap up their own debt:
1. The Bank offers the debt for $0.10
2. The debtor doesn't repay because he legitimately can't scrape up that much
3. The Bank offers the debt for $0.10, but nobody wants to buy it, because they can infer that the debtor has nothing
4. The Bank offers the debt for $0.09... (begin loop)
Thirdly, it's a logistical nightmare. The Bank can't just combine the debt of it's 1000 deadbeat debtors and sell it off to a debt collection agency for a lump sum. No, it needs to send 1000 mailing notifications and 1000 second-notifications and wait 30 days, etc... And then 120 of them buy their own debts, and the bank can't re-price it's set of 880 accounts without sending 880 mailing notifications (begin loop)
Fourth, what happens if it's not a straight sale? Suppose the Bank barters your debt to a collection agency for a thing (like privately-held stock) in the collection agency? You can't buy your debt because you can't provide what the Bank is looking for... And then the bank can just sell whatever-it-is later.
TLDR: Exploding legal complexity combined with shady/manipulative actions from everybody.
Your credit score (and collateral, if it's a secured loan) is your incentive to repay the debt at face value. So I disagree that people would choose to default just because they can get it for pennies on the dollar. And given the ability of people to do that would be rather limited (as after the first time they'd have shot their credit score) it doesn't seem like it would create any sort of unworkable problems for the industry.
>First, you get a horrible incentive to not repay debts
Isn't that what credit ratings are for? You'd be able to do this exactly once for any meaningful amount of money, and then your financial life would be otherwise over.
You can walk away from hundreds of thousands of dollars in mortgage debt and still have a 700 credit score, all of your credit cards, and the ability to still get credit.
Defaulting on debt doesn't mean your financial life is over by any means.
There's already a big incentive not to repay debts. Some places give up without doing anything, some will offer to discount your debt even before sending it to collections. This might make the incentive a little worse, but the jerk would still get the negative credit report entry, which is presumably the bigger punishment than having to dodge some collector for a while.
Regarding the latter, I expect the stable solution is that the bank offers a package of 1000 items, the agency offers a price per dollar of debt, and 14 days later the agency receives the 880 accounts and pays on a per debt-dollar basis. It adds some risk, but debt collection agencies are experts at pricing risk.
There are other mechanisms for price discovery here that can avoid some of the downsides you describe. It needn't be a offer/counter-offer process where both sides see the numbers.
No, prices would NOT be discovered quickly, because the bank cannot proceed without getting a response from the debtor... or waiting long enough that they can legally treat it as rejected.
That probably means at least two or three snail-mail notifications and a month of waiting time... Defaulting debtors correlate heavily with people who cannot be contacted or will not respond.
First, you get a horrible incentive to not repay debts:
1. A relatively innocent and good-natured Bank lends a jerk $1.00
2. The jerk refuses to pay it back, knowing the bank can't transfer it to someone who isn't a pushover without giving him a steeply-discounted offer first
3. In response all loan requirements and interest rates rise for everybody
Secondly, it fucks up the negotiations, because would-be buyers can infer something when the creditor doesn't snap up their own debt:
1. The Bank offers the debt for $0.10
2. The debtor doesn't repay because he legitimately can't scrape up that much
3. The Bank offers the debt for $0.10, but nobody wants to buy it, because they can infer that the debtor has nothing
4. The Bank offers the debt for $0.09... (begin loop)
Thirdly, it's a logistical nightmare. The Bank can't just combine the debt of it's 1000 deadbeat debtors and sell it off to a debt collection agency for a lump sum. No, it needs to send 1000 mailing notifications and 1000 second-notifications and wait 30 days, etc... And then 120 of them buy their own debts, and the bank can't re-price it's set of 880 accounts without sending 880 mailing notifications (begin loop)
Fourth, what happens if it's not a straight sale? Suppose the Bank barters your debt to a collection agency for a thing (like privately-held stock) in the collection agency? You can't buy your debt because you can't provide what the Bank is looking for... And then the bank can just sell whatever-it-is later.
TLDR: Exploding legal complexity combined with shady/manipulative actions from everybody.