In the last post, I mentioned that the JDB, by buying the debt, is getting more than one might imagine they are by buying "junk" at salvage value. Is it possible that the JDB is actually going to return real value to the purchased items (the defaulted, charged-off accounts)? Is this even possible with salvaged assets of any kind?
Well, sometimes it is possible to return real market value to salvaged junk:
If we are talking about a physical item--say a car--paying "salvage value" for depreciated "junk" is not necessarily going to add up to the actual value of the item on resale. The buyer of the good has the choice of whether to try to "rebuild" or "rehab" the item prior to resale or not. Whether they go to the trouble or just try to sell the thing for parts/recycling hinges on a number of factors, including what the resale value of the "rehabbed" item is or is likely to be.
So the businessman buys the "junk" car. Assuming it is in good enough condition (or valuable enough once restored), by putting time, money, and effort into the vehicle, it is possible to increase the value of that car. In some cases, it might actually be worth as much or more than the car was worth when it was new, in essence recovering the full value of the item. Even if the depreciation is not totally recovered on resale, this "rehab" of the car represents measurable "value-added" to the car making the cost of the original acquisition NOT the same as the sales price and legitimately so since the buyer, now seller, has risked money, effort, and time up front of their own to "improve" the good.
However, can this "value-added" situation apply to the "product" a JDB has to offer? Hardly:
Unlike that car, the very fact that the account has "aged" without being paid off is a form of depreciation that can NEVER be recovered. (Think the "time value of money"
here.) The JDB cannot "repair" the problem or "restore" the asset to full value due to the nature of the asset. Therefore the JDB, by demanding full payback, is doing the same thing as if the buyer of the junk car would if they tried to sell the badly-depreciated asset (that junk car) "as-is" for the original new car sticker price.
Most of us would call selling broken-down "junk" at new item prices a "rip-off". BUT that's EXACTLY what the JDB is trying to do: Ask full price for something that is no longer worth that amount and can never be worth that much ever again.
If it gets to litigation? By demanding that "full price" for an item that they DID NOT improve upon and could not improve upon within the limits of the JDB's business model as "damages" is asking the court, in essence, to defraud the defendant debtor. How? If the full amount is awarded in damages, the judgment debtor is being made to "reimburse" the JDB an amount far and beyond the actual amount they risked to get the "product" plus a reasonable fee for the JDB's time and trouble to the extent of a usurious rate of return on a "defective" product.