Can You Buy Someone’s Debt? How It Works

The concept of “buying debt” involves acquiring the right to collect on an outstanding obligation. This practice encompasses both private agreements and a sophisticated industry involving the bulk sale of financial obligations. Understanding the distinct scenarios is important, whether an individual seeks to manage a specific personal debt or a business engages in large-scale acquisitions.

Can an Individual Buy Specific Debt?

Individuals often wonder if they can purchase a specific debt, such as that of a friend or family member. Directly “buying” an active, specific debt from a major creditor like a bank or credit card company, in the way a debt buyer does, is generally not feasible for an individual. Financial institutions typically sell debt in large, anonymized portfolios, making it nearly impossible for a consumer to target and acquire a single account. Privacy laws also present significant barriers to obtaining detailed information about another individual’s specific debt for purchase.

Despite the challenges of direct purchase, individuals can effectively take on someone else’s debt through alternative methods. One straightforward approach involves direct payment, where an individual simply pays the creditor on behalf of the debtor. This action satisfies the debt, but it does not constitute “buying” the debt in a legal sense, as ownership is not transferred.

Another scenario involves debt assumption, which is possible for certain types of loans under specific conditions. Mortgages, particularly government-backed ones like FHA or VA loans, can sometimes be assumable. This process requires the new party to undergo a credit check and lender approval, essentially taking over the original borrower’s remaining balance and terms, including the interest rate. Similarly, some auto loans might be assumable, but this also requires the lender’s permission and the new borrower’s qualification, including a credit review.

Individuals can also enter into private agreements to pay off another person’s debt. In such arrangements, the individual makes payments directly to the original creditor, or the original debtor continues making payments while being reimbursed by the other party. Without a formal assumption process approved by the lender, the original debtor remains legally responsible for the obligation until the debt is fully paid.

The Business of Debt Purchasing

Large-scale debt acquisition operates as a distinct financial sector, involving specialized entities that purchase outstanding obligations. Debt buyers, who may include debt collection agencies, dedicated investment firms, or other financial institutions, acquire delinquent or charged-off debts from original creditors. These buyers then attempt to collect the amounts owed, often for a profit.

Original creditors, such as banks, credit card companies, and healthcare providers, sell debt primarily to recover some value from non-performing assets. Selling these accounts also reduces the administrative burden of pursuing collection efforts internally and helps improve their balance sheets by removing uncollectible accounts. This allows creditors to focus on their primary business operations rather than extended collection activities.

The types of debt commonly traded in this market are diverse, including credit card debt, medical bills, installment loans, and auto loan deficiencies. These often involve “charged-off” accounts, which are debts that the original creditor has deemed unlikely to be collected and written off as a loss after a period of non-payment, typically 120 to 180 days. Although charged-off, the debtor remains legally obligated to repay the debt.

Debt is almost always sold in large portfolios rather than as individual accounts. These portfolios are sold at a significant discount from their face value, reflecting the inherent risk and difficulty of collection. The discount can vary widely, with debts often purchased for as little as 4% to 50% of the original amount, and sometimes even less than a cent on the dollar, depending on factors like the debt’s age and collectability.

How Debt Portfolios Are Sold and Transferred

Selling and transferring debt portfolios among businesses involves several steps to facilitate the transaction and ensure compliance. Debt portfolios are typically sold through various channels, including online auctions, direct negotiations between sellers and buyers, or via brokers specializing in debt sales. Sellers, often financial institutions, prepare their portfolios by categorizing the debt and compiling documentation.

Potential debt buyers undertake a thorough due diligence process before making a purchase. This involves assessing the financial stability and track record of the seller, reviewing sample data from the portfolio, and evaluating the collectability of the debts. Buyers scrutinize details such as account balances, payment histories, and consumer information to ensure data accuracy and compliance with regulations. This rigorous review helps buyers determine a fair purchase price and manage potential risks.

When a debt portfolio is sold, specific information related to the debtors is transferred to the new owner. This data typically includes the debtor’s name, last known address, account number, the original balance, and payment history, along with the date of the last payment. Handling this sensitive personal information requires strict adherence to privacy agreements and security protocols to protect consumer data.

Debtors are typically notified when their debt has been sold to a new entity. Under federal regulations, the new debt collector is generally required to send a written notification, often called a debt validation letter, within five days of their initial communication with the debtor. This letter provides essential details, including the total amount of the debt, the name of the original creditor, and information about the debtor’s rights to dispute the debt. In some cases, one entity may own the debt while another is contracted to perform collection activities, distinguishing ownership from servicing rights.