$25k loan, no payments and bankruptcy filed

[ktrdsl23]

As the title states one of my loans on Prosper was part of a $25k loan which originated on 4/2.  The borrower didn't make any payments and now it says that collection activity has been suspended due to a bankruptcy filing by the borrower.  Wouldn't this be viewed as fraud by any bankruptcy judge?  Clearly the borrower knew that they were going to be filing for bankruptcy when taking out the loan.  The loan purpose is Debt Consolidation. 

I fully recognize the risks when making P2P loans but as I see instances such as these it really leaves a sour taste that individuals are taking advantage of the bankruptcy system and you would think that this type of activity needs to be discouraged at the court levels.  My guess is that the borrower either took out this $25k and went on an elaborate vacation or somehow laundered the money so that they will have access to it after the bankruptcy proceedings conclude.

[Fred93]

If I were the judge I would certainly consider the possibility that it was fraud.  However, I expect that Prosper won't even make the appropriate filings in the bankruptcy case, so the fact surrounding your loan won't even be considered by the judge.

[Rob L]

I've had a few; it happens.
Just curious, but what was the credit grade and interest rate assigned the loan by Prosper?

[ktrdsl23]

I've had a few; it happens.
Just curious, but what was the credit grade and interest rate assigned the loan by Prosper?

It was graded a C by Prosper and the credit rating was 680-699.  0 deliquencies in the past 7 years.

[craigwbryant]

Wouldn't a credit report show that $25k was borrowed less than 60 days before the filing, regardless of Proper filing anything in the bankruptcy case.  I thought a thorough investigation to determine all debts was part of a bankruptcy filing, so the court would know about the loan.  Now, whether they deem it fraud or not is another story. 

[ktrdsl23]

If I were the judge I would certainly consider the possibility that it was fraud.  However, I expect that Prosper won't even make the appropriate filings in the bankruptcy case, so the fact surrounding your loan won't even be considered by the judge.

That's really too bad.  It seems that Propser and LC need to put in some basic effort to these types of activities to discourage the practice.  Assuming it is not considered and the borrower essentially got a free $25k you can bet he/she would tell their family and/or friends about it in the future if somebody else is contemplating retirement. 

They need to invest some money in defending these to discourage the behavior even if the costs will outweigh any money recuperation.

[kya]

starting to see more and more of this as of late....a last ditch money grab right b4 the consumer pulls the plug....lc and prosper should be represented at the first meeting of creditors and also file a objection to the bk plan...will they? who knows

[AnilG]

There is very little incentive for LC and Prosper to pursue such collections and recoveries claims. When LC was investing its own money in loans, they pursued collections and recoveries more vigorously (11.19% collection in 2007 vs 5.53% collection in 2011). It is no longer Prosper and LC money at risk.

That's really too bad.  It seems that Propser and LC need to put in some basic effort to these types of activities to discourage the practice.  Assuming it is not considered and the borrower essentially got a free $25k you can bet he/she would tell their family and/or friends about it in the future if somebody else is contemplating retirement. 

They need to invest some money in defending these to discourage the behavior even if the costs will outweigh any money recuperation.

[nonattender]

There is very little incentive for LC and Prosper to pursue such collections and recoveries claims. When LC was investing its own money in loans, they pursued collections and recoveries more vigorously (11.19% collection in 2007 vs 5.53% collection in 2011). It is no longer Prosper and LC money at risk.

I think there's another possible interpretation as to why - after years of adjusting underwriting to fight adverse selection  - the # is lower.

Eh?

[kya]

if they dont start pursuing obvious fraud their model will eventually blowup especially when times get tough...dont think for a minute that potential investor funds wont flee in record numbers if things go bad.... thats why i have limited my total investment to $40k approx .... i know for a fact that lc &prosper are not collecting and all the other things that go with it on the back end of the operation like a discover, cap 1 or even wells would do. If this same situation would have happened to one of those 3 they would have their  legal sharks involved in the bk proceedings from the start...

[AnilG]

Majority of effort appears to be on the fraud prevention and risk management rather than collection and recoveries. The quest to increase originations and revenue will trump any such risk management attempts, like what happened with banks issuing mortgages to unqualified borrowers in order to boost their own bottom lines.

It takes a while before such trends start to become apparent and show impact on bottom line of the investors so I don't expect investors to react swiftly before it is too late. These are illiquid investments with limited liquidity so the existing investors' funds are stuck until loans fully mature. Platforms are doing their best to prevent secondary market from taking hold. Stopping new fund inflow is the only lever most investors have. In such situations, platform will do the same as what Prosper did in the past, abandon Prosper 1.0 and re-introduce as "better improved" Prosper 2.0, or what Lending Club did, claim the earlier loans don't meet current credit policies and exclude them from track record.

"Not having skin in the game" has become an important risk with such platforms, incentives are no longer aligned and are at odds between the platforms and the investors who are bearing all the risk. Without having some sort of risk-mitigation mechanism for investors there will be lot of hurt when things go sour. Personally I believe anyone investing more than 10% of their portfolio in such platforms should reconsider the exposure.

if they dont start pursuing obvious fraud their model will eventually blowup especially when times get tough...dont think for a minute that potential investor funds wont flee in record numbers if things go bad.... thats why i have limited my total investment to $40k approx .... i know for a fact that lc &prosper are not collecting and all the other things that go with it on the back end of the operation like a discover, cap 1 or even wells would do. If this same situation would have happened to one of those 3 they would have their  legal sharks involved in the bk proceedings from the start...

[kya]

agree...thats why even though i enjoy p2p lending and have made ok returns doing it over the past 3-4 years i will never have more than a small position in it for most of the reasons you posted above....its easy to just buy some closed end funds selling at 10% or greater discount to net asset value that yield 6-11% and you can sell in seconds any trading day you want

[jheizer]

As someone I knew totally get this.  I have ~2/3 of my planned money invested and 1/3 waiting as I try to selectively invest and I still have ~1% of my loans sitting in a late status on the first payment.  Some have no collections info at all logged. 

[digit5]

Trying to gauge the risk factor of a loan is close to being a crap shoot. I have been invested in Prosper for over 2 years. Recently I had a loan written off where the borrower had a Prosper score of "10." I also had another loan default where the borrower had a credit score of over 820.

[kya]

thats why you just have to look at the big picture.... i used to go back and review every past due i had(just like i did in my banking years) looking for trends etc.... i just dont do it much anymore because it will drive you nuts... for the most part there was no trend... other than a couple obvious ones...current delinq, lower score, # of inq