How Much Do Debt Buyers Pay for Debt?

Debt, like any other asset, can be bought and sold. This practice involves entities specializing in acquiring outstanding obligations from original creditors. This article explores the specifics of debt purchasing, shedding light on the mechanics and implications of this industry, particularly how much these buyers typically pay for debt.

What is Debt Buying?

Debt buying involves third-party entities acquiring non-performing or charged-off accounts from original creditors (e.g., banks, hospitals, credit card companies). Original creditors often sell debt to manage balance sheets, recover capital, and reduce in-house collection costs. Once sold, the debt buyer owns the legal right to collect.

The market for purchased debt includes various types of consumer obligations. Commonly traded debts include credit card balances, medical bills, and personal loans. Auto loan deficiencies, which represent the remaining balance after a repossessed vehicle is sold for less than the amount owed, are also part of this market.

Factors Determining Debt Value

The price a debt buyer pays for an outstanding obligation is influenced by several factors. Newer debt generally commands a higher price than older debt, as the likelihood of successful collection tends to decrease over time. For example, fresh debts less than six months old might sell for 7-15 cents on the dollar, while debts several years old could go for less than a penny. The type of debt also plays a role; unsecured obligations like credit card debt or medical bills typically sell for less than secured debts like auto loans, which are tied to tangible assets.

Documentation and data quality are important considerations. Comprehensive and accurate information about the debtor and original account documents can increase the debt’s value to a buyer. The debtor’s financial situation, including available information on income, employment, and credit history, can further influence the perceived collectibility. Additionally, the original creditor’s collection history, indicating prior attempts and their success, informs the buyer’s assessment.

The volume of debt purchased significantly affects the per-account price; larger portfolios often result in lower unit costs for the buyer. Legal jurisdiction is another factor, as state laws regarding debt collection practices and statutes of limitations can impact collectibility and the strategies a buyer can employ. These elements collectively determine the risk and potential return for a debt buyer, directly influencing the purchase price.

Common Purchase Price Ranges

Debt buyers acquire consumer debt for a small fraction of its original face value, often “pennies on the dollar.” The exact percentage varies considerably based on the type of debt and its characteristics. For instance, charged-off credit card debt is frequently sold for a few cents on the dollar, commonly ranging from 2% to 7% of the face value. Newer or less delinquent credit card accounts might fetch a slightly higher percentage.

Medical debt is often acquired at very low rates, sometimes between 1% and 5% of the original amount. This lower valuation reflects the complexities associated with medical billing, insurance issues, and the generally lower collectibility of these accounts. Auto loan deficiencies, which are the remaining balances after a vehicle repossession and sale, might command slightly higher percentages than unsecured debt, particularly if there is a clearer deficiency judgment or if state laws are favorable to collection.

Personal loan debt typically sells within a range similar to credit card debt, depending on its age and the completeness of the documentation. While specific percentages can fluctuate with market conditions, it is common for debt buyers to pay an average of around 4% of the original debt value.

The Debt Buyer’s Collection Strategy

Debt buyers profit by acquiring debt at a substantial discount and recovering more than their acquisition cost. Their objective is to collect as much as possible from purchased debt portfolios, covering operational expenses. This strategy begins with evaluating portfolios for collectibility before making purchase offers.

Once debt is acquired, debt buyers employ various collection methods. They may engage in direct collection efforts using their in-house teams or by outsourcing to third-party collection agencies. Another common tactic is litigation, where they file lawsuits to obtain judgments against debtors, which can then lead to wage garnishments or bank account levies. In some cases, if initial collection attempts prove unsuccessful, a debt buyer might choose to resell the debt to another buyer, further down the chain, albeit at an even lower price.

What It Means for Debtors

When a debt is acquired by a debt buyer, the debtor may experience a change in who collects. Debtors typically receive notification of the debt transfer. Debt buyers, as debt collectors, are subject to federal regulations, including the Fair Debt Collection Practices Act (FDCPA). This act prohibits abusive, deceptive, and unfair debt collection practices.

Debtors have rights under the FDCPA, including the right to request validation of the debt. The debt buyer must provide written verification of the debt (including the amount owed and the name of the original creditor) if requested within 30 days of the initial communication. A debt buyer must cease collection efforts until this validation is provided. Additionally, debtors may have the opportunity to negotiate a settlement for less than the full amount owed. Seeking such a settlement can be a practical step toward resolving the obligation.