Who Buys Debt and What Types of Debt Are Sold?

Debt, like other assets, is bought and sold in a specialized secondary market. This market allows original creditors to sell accounts they deem uncollectible, converting non-performing assets into immediate capital. Various entities acquire these debts, each with distinct operational models. This article outlines the primary participants in this debt market and the common types of debt frequently traded.

Primary Entities That Purchase Debt

Debt purchasing firms, also known as debt buyers, acquire portfolios of defaulted debts from original creditors like banks or hospitals at a reduced cost. Their business model involves recovering the full amount owed, profiting from the difference between the purchase price and the collected amount. These firms range from small private businesses to large public corporations.

Some debt collection agencies purchase debt, unlike those that only collect on behalf of original creditors. While many agencies work on a contingency basis, others buy debt portfolios outright. Owning the debt directly gives these agencies full legal rights to collect, aiming to maximize their return on investment.

Investment funds, including hedge funds and private equity firms, are major buyers of distressed debt. These institutional investors acquire large, complex debt portfolios from financially troubled entities, seeking high-risk, high-reward opportunities. Their financial models help them identify and extract value from debt others might consider worthless. These funds often aim to influence debt restructuring or convert debt into equity for significant returns.

Banks and other financial institutions, though typically original creditors, also purchase debt in specific situations. They acquire loan portfolios from other institutions, especially during mergers, acquisitions, or to diversify assets. Banks might buy performing or non-performing loan portfolios to improve financial performance, manage risk, or expand into new markets. This allows them to gain interest income or value from underlying securities.

Categories of Debt Frequently Sold

Credit card debt is one of the most common types sold in the secondary market. Its high volume and unsecured nature make it a frequent candidate for sale by original creditors. When accounts become severely delinquent, typically after 180 days past due, banks often charge them off and sell them to debt buyers.

Medical debt is another category sold by healthcare providers. If patients’ substantial medical bills become uncollectible, hospitals and clinics may sell these accounts to specialized debt purchasers. This allows original creditors to recover some value from outstanding balances that might otherwise be written off.

Auto loan deficiencies are a notable segment of the debt market. When a vehicle is repossessed due to missed payments, the lender typically sells it. If the sale proceeds do not cover the remaining loan balance, the borrower is left with a “deficiency balance.” These balances are sold to debt buyers, who then attempt to collect the remaining amount.

Retail and other consumer loan debt, including personal loans, payday loans, and various consumer credit forms, are regularly traded. Lenders sell these unsecured debts when they become non-performing, seeking to recover a portion of the original loan value. Selling these portfolios provides immediate cash flow to original creditors.

Private student loan debt, unlike federal student loans, can be sold in the secondary market. Private lenders may sell defaulted student loan accounts to debt buyers. This allows them to manage balance sheets and reduce the administrative burden of collecting delinquent loans.

Commercial debt, involving business-to-business obligations, is also part of the debt buying industry. This includes unpaid invoices, commercial leases, or business loans that have defaulted. Companies may sell these non-performing commercial accounts to specialized debt buyers to improve liquidity and focus on core operations.