Law firms working for collectors file thousands of templated lawsuits at once. The goal is not to win in court, but to generate valuable 'default judgments' when the vast majority of debtors don't show up. This automated legal process transforms unsecured debts into garnishable assets.

While many assume high credit card rates cover default risk, actual charge-offs on revolving balances average only 5.75%. This is a significant cost but accounts for less than a third of the typical interest rate spread, indicating that other factors like risk premiums and operating costs are major drivers.

Unlike syndicated loans where non-payment is a clear default, private credit has a "third state" where lenders accept PIK interest on underperforming loans. When this "bad PIK" is correctly categorized as a default, the sector's true default rate is significantly higher, around 5% versus 3% for syndicated loans.

Recent credit failures and frauds are not 'systemic' risks that threaten the entire financial system's structure. Instead, they are 'systematic'—a regularly recurring behavioral phenomenon. Good times predictably lead to imprudent lending, creating clusters of defaults. The problem is human behavior, not a fundamental flaw in the market itself.

With the average defaulted debt around $2,000, individualized attention is unprofitable. This economic reality forces the industry into a scalable, 'McDonald's burgers' approach that relies on cheap labor and automated systems, which inevitably leads to errors and abuse.

Lenders allow struggling borrowers to skip cash interest payments by adding the amount to the loan's principal balance. This practice, called 'Payment in Kind' (PIK), hides defaults, artificially inflates asset values, and creates a deceptively low official default rate, masking escalating risk within the system.

Affirm's CEO argues the core flaw of credit cards is not high APRs, but a business model that profits from consumer mistakes. Lenders are incentivized by compounding interest and late fees, meaning they benefit when customers take longer to pay and stumble.

Unlike past recessions where defaults spike and then recede, the current high-rate environment will keep financially weak 'zombie' companies struggling for longer. This leads to a sustained, elevated default rate rather than a sharp, temporary peak, as these firms lack the cash flow to grow or refinance.

The current rise in private credit stress isn't a sign of a broken market, but a predictable outcome. The massive volume of loans issued 3-5 years ago is now reaching the average time-to-default period, leading to an increase in troubled assets as a simple function of time and volume.