Yesterday, I was wondering about a possible way of making money, which I suspect is a sort of fraud:

  1. John Doe gets a loan from the bank
  2. He does not pay the bank for months, or years.
  3. He receives a call from the bank OR calls the bank to renegotiate the debt saying he simply cannot pay for it all.
  4. He eventually pays less than what he borrowed for the bank accepts receiving less money instead of receiving nothing.

Is this sort of thing common (or even possible)? Is there a name for it or anything? Thanks.

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    If you take a loan knowing at the time that you aren't going to pay it back, it's always a fraud, no matter how you look at it. – Moyli Jul 19 '16 at 14:01
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    If you kill someone but convince everyone that it was an accident, is it still a murder? – Moyli Jul 19 '16 at 14:04
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    @MagisterMundus Fraud is a criminal act; they will not just seek damages from you, they will seek jail time. – Grade 'Eh' Bacon Jul 19 '16 at 14:50
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    This was addressed on Law.SE: Is it a crime to take out a loan with no intention to repay? – Nate Eldredge Jul 19 '16 at 20:36
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    Already addressed on law.se, voting to close – keshlam Jul 19 '16 at 21:01

This is possible. In fact in the cases of debt settlement the collection companies typically issue a 1099 for the difference on what is owed and what is settled, making that taxable income. So the IRS sees it as income (in the US).

However, this kind of dishonesty is not conducive to building long term wealth or wealth of significant means.

As others have said this is fraud, but provided that one is truthful on the loan application, it would be impossible to prove. How can one prove that a person has no intention of paying a loan back?

Doing this once or twice may ruin your ability to receive a loan for legitimate purposes for life.

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    Considering I am not American, could you explain the 1099 part for a "newbie"? Unfortunately, I don't possess that much knowledge about financial stuff. – MagisterMundus Jul 19 '16 at 14:08
  • NP, a 1099 is a statement of income. If I hire a person to clean my office building and pay them 10,000 in a year for the service. Often I will issue a 1099, so I can deduct the expense and the IRS knows they received income. – Pete B. Jul 19 '16 at 14:15

You could do that once, maybe, if the lender negotiates rather than going to court and taking you for everything you have plus having you wages garnished for the next several decades. And in the process, you would destroy your credit rating, making it impossible to borrow again any time soon.

Doing this deliberately is fraud ... But worse than that, it's blatently stupid. You are likely to lose far more than you could gain.

  • Thanks for your answer, unfortunately I can't upvote you since I have only 1 reputation... – MagisterMundus Jul 19 '16 at 14:49

Maybe. As other have said, doing this deliberately is fraud, but almost impossible to prove unless you've lied on the loan documents or discussed your plans with witnesses. The lender may consider negotiating a partial write-down of the loan, but that is far from their only option. Depending on the details of the loan agreement they may be able to garnish your wages, seize your property, or walk into your business with a sheriffs' deputy and empty your cash register. They may also be able to add their costs for recovering the money to your debt.

  • I would say that if you take out a loan and not make one single repayment would go towards proof the bank needs for your intentions. – Victor Jul 19 '16 at 21:57

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