How Does the Process of Buying Debt Work?

The process of buying debt involves specialized companies purchasing overdue accounts from original creditors. This practice allows creditors to recover some value from delinquent accounts instead of continuing their own collection efforts.

Defining Debt Buying

Debt buying fundamentally involves companies acquiring delinquent or charged-off consumer debts from original creditors. This differs from a traditional debt collection agency, which typically collects debts on behalf of the original creditor for a fee or commission without owning the debt itself. Debt buyers, in contrast, purchase the legal right to collect the debt and become the new owners of the accounts.

Original creditors, such as banks, credit card companies, and utility providers, sell these debts primarily to recover some value from accounts they deem unlikely to be collected through their internal efforts. Selling debt helps these creditors clean up their balance sheets, avoid the ongoing costs associated with difficult collection, and recover partial losses. A “charged-off” debt refers to an account that a creditor has determined is unlikely to be paid back, typically after it has been delinquent for 120 to 180 days. Once charged off, the debt is removed from the creditor’s active accounts and reported as a loss on their financial statements, though the debtor still legally owes the amount.

Entities engaged in debt buying range from large publicly traded corporations specializing in debt acquisition to smaller, privately held firms and even some collection agencies with a purchasing arm. These buyers acquire the debt with the intent to collect the full amount owed, making a profit from the difference between the purchase price and the amount collected.

The Debt Acquisition Process

Debt is typically bought and sold in “portfolios” or “bundles,” rather than as individual accounts. These portfolios contain numerous accounts that creditors have decided to sell. The valuation of these portfolios considers several factors, including the age of the debt, the type of debt, the last payment made by the consumer, and the available information about the debtor. Older debts generally sell for less than newer debts due to a lower perceived collectability.

Debt is commonly sold for “pennies on the dollar,” meaning the purchase price is a small fraction of the debt’s face value. For example, credit card debt often sells for 4 to 7 cents on the dollar, while medical debt might be purchased for 1 to 5 cents on the dollar. The price can vary significantly, with fresh debts (less than six months old) potentially selling for 7 to 15 cents on the dollar, and debts several years old sometimes going for less than a penny.

The transfer of ownership involves the debt buyer acquiring the contracts and all associated rights and benefits previously held by the original creditor. This includes the right to collect the full amount of the debt. Debt buyers often receive an electronic file containing limited information about the accounts in the portfolio, and sometimes, comprehensive documentation of the debts is not transferred.

Categories of Purchased Debt

The debt buying market primarily deals with various types of consumer debt that have become delinquent or charged-off.
Credit card debt is a prevalent category, constituting a substantial portion of accounts sold to debt buyers, often due to high volume and unsecured nature.
Medical debt is another common type, reflecting complexities in healthcare billing and payments.
Auto loan deficiencies, representing the remaining balance owed after vehicle repossession and sale, frequently enter the market.
Older utility bills can also be bundled and sold to debt buyers.

Post-Purchase Debt Collection

After acquiring a debt portfolio, a debt buyer undertakes steps to collect the outstanding amounts. Initially, the debt buyer updates account information and attempts to locate the debtor through various means. Communication methods typically involve sending letters, making phone calls, and, in some cases, using emails. The goal is to establish contact and begin the collection process.

Consumers have a right to debt validation, which means they can request proof that they owe the debt and that the debt buyer has the legal right to collect it. The Fair Debt Collection Practices Act (FDCPA) requires debt collectors to provide a validation notice within five days of their initial communication, detailing the amount owed, the name of the creditor, and information on how to dispute the debt. If a consumer disputes the debt in writing within 30 days of receiving this notice, the debt collector must stop collection efforts until they provide verification of the debt.

Potential outcomes of post-purchase debt collection include negotiating a settlement for less than the full amount owed. Debt buyers often purchase debts at a significant discount, allowing them flexibility to accept a reduced payment, sometimes 30% to 50% of the original balance. Debtors may also arrange payment plans. In some instances, if collection efforts are unsuccessful, debt buyers may pursue legal action, which can lead to court judgments allowing for wage garnishment or bank account levies.

Consumer Protections and Regulations

The debt buying and collection industry operates under a legal framework designed to protect consumers from abusive, unfair, or deceptive practices. The primary federal law governing these activities is the Fair Debt Collection Practices Act (FDCPA), enacted in 1977.

The FDCPA prohibits collectors from contacting consumers before 8:00 a.m. or after 9:00 p.m. local time, and they cannot contact consumers at work if they know the employer prohibits such communications. Harassment, threats, or the use of obscene language are strictly forbidden.

Regulatory oversight for the debt collection industry, including debt buyers, is primarily provided by the Consumer Financial Protection Bureau (CFPB). The CFPB enforces consumer finance protection regulations and aims to safeguard consumer rights in the financial marketplace. While the FDCPA provides federal standards, consumers may also have additional protections under various state laws.