Can You Sell Debt? What Creditors and Debtors Should Know

Selling debt is a common practice in the financial sector, involving the transfer of a financial obligation’s ownership from an original lender to another entity. This process impacts both the original creditor and the individual or business owing the money. Understanding how this transfer of ownership occurs and its implications is important for anyone involved in a financial obligation.

Understanding Debt Selling

Debt selling involves transferring the right to collect a financial obligation from an original creditor to a new party. Creditors sell debt as a strategic decision to improve immediate cash flow, offload underperforming loans, or reduce the administrative burden of managing delinquent accounts. This allows them to recover value from obligations that might otherwise remain uncollected.

The primary participants in a debt sale include the original creditor, who is the seller, and the debt buyer, who is the purchaser. The original creditor initially extended the credit and is now transferring their right to collect. Debt buyers are entities that specialize in acquiring these financial obligations, often at a discounted rate. The original debtor, the individual or entity who owes the money, remains obligated to repay the debt, though the party they owe changes.

Categories of Debt That Can Be Transferred

Many different types of financial obligations can be bought and sold in the market. Consumer debt represents a large segment of these transactions, including credit card debt, personal loans, auto loans, and private student loans. These types of obligations are frequently sold due to their high volume and because they are often unsecured or under-collateralized, making direct collection efforts resource-intensive for original creditors.

Mortgage debt is another significant category, commonly transferred through a process known as securitization. In securitization, numerous mortgage loans are pooled together and then sold as bonds to investors, creating mortgage-backed securities. This allows lenders to remove loans from their balance sheets and generate capital for new lending activities.

Commercial debt, encompassing business loans and trade receivables, which are monies owed to a business by its customers, also regularly changes hands.

The Mechanics of Debt Transfer

The transfer of a financial obligation typically begins with the valuation of debt portfolios. These portfolios, which consist of unpaid financial obligations, are usually sold for “pennies on the dollar” rather than their full face value. The price paid by a debt buyer is influenced by several factors, including the age of the obligation, its type, the likelihood of collection, and the available information about the debtor. For instance, “fresh debt”—recently charged-off debt—might sell for approximately 7 to 15 cents on the dollar, while older debts could be purchased for less than a penny up to 7 cents on the dollar.

Once a valuation is agreed upon, the legal transfer of ownership occurs through an assignment or sale agreement. This formal agreement legally transfers the right to collect the obligation from the original creditor to the debt buyer. For a legal assignment to be effective, it typically must be in writing and signed by the original creditor, and the debtor must receive written notice of the assignment. However, notification to the debtor may not always be immediate, especially if the original creditor continues to service the debt on behalf of the new owner.

After acquiring the debt, debt buyers often specialize in collecting these obligations themselves or may contract with third-party collection agencies. These agencies then undertake the efforts to recover the outstanding amounts.

What Happens When Your Debt Is Sold

When a financial obligation is sold, the individual or entity owing the money still retains the fundamental responsibility to repay it, but the party to whom payments are directed may change. It becomes important for the debtor to verify the identity of the new owner of the debt to ensure payments are sent to the correct and legitimate entity. Debtors can request information such as the new owner’s name, company address, and telephone number to confirm legitimacy.

The sale of a financial obligation does not diminish the debtor’s rights. Federal laws, such as the Fair Debt Collection Practices Act (FDCPA), provide protections for consumers against abusive, deceptive, and unfair debt collection practices. Under the FDCPA, a debt collector must send a written debt validation notice within five days of their initial communication, detailing the amount owed, the original creditor’s name, and instructions on how to dispute the debt.

If a debtor disputes the obligation in writing within 30 days of receiving this notice, the collector must cease collection activities until they provide verification of the debt.

Regarding credit reports, the act of selling the debt itself may not directly impact a credit score, but the underlying delinquency that led to the sale will already be reflected. The new debt owner may report the status of the obligation to credit bureaus, which can further influence the credit report. Debtors may begin receiving communications from the new debt owner or their assigned collection agency. It is advisable to understand and assert consumer rights during these communications, including the right to request that collectors stop contacting them or to specify preferred communication methods.