The debt buying industry is a big business where debt buyers buy delinquent debts, including credit card debt, medical bills and auto loans at a discount. By buying debts cheap they aim to collect payments and turn unpaid accounts into big profits.
This guide simplifies the debt buying process, and explains how debt buyers work, the pros and cons of debt buying and tips for navigating the process.
What Is The Debt Buying Industry?
The debt buying industry involves buying delinquent debts from creditors such as banks, credit card companies and other financial institutions. A debt collection agency works on collecting debts owed to other companies but doesn’t own the debts themselves. Debt buyers buy these debt portfolios at a fraction of the face value and become the new owners of the debts. They then use various methods such as contacting debtors or hiring collection agencies to collect payments.
The industry is governed by laws like the Fair Debt Collection Practices Act (FDCPA) and overseen by organizations like the ACA International, Receivables Management Association International (RMAI to protect consumers and ensure ethical practices.
Why Debt Buyers Buy Portfolios
Debt buyers buy delinquent accounts for:
- Profit: By paying only a fraction of the face value, debt buyers can collect the full balance and make big profits.
- Diversification: Buying portfolios of different types of debt, such as medical debt, retail accounts and utility bills reduces risk.
- Opportunity to Negotiate: Debt buyers can offer payment plans or settlements and increase the chances of getting paid.
How Does The Debt Buying Process Work?
Step 1: Buying Debt Portfolios
Debt buyers buy portfolios from debt sellers which include creditors, collection agencies and debt brokers. These portfolios usually contain:
- Credit card debt
- Medical bills
- Utility bills
- Auto loans
- Charged-off debt
Step 2: Evaluating the Portfolio
Debt buyers do due diligence, reviewing:
- Face Value: The total amount owed in the portfolio.
- Account Data: Debtor information like social security numbers and payment history.
- Legal Documentation: Compliance with debt collection laws.
Step 3: Collection
Once the debt buyer owns the portfolio they use various methods to collect payments, such as debt buyer contacts which can result in repeated attempts to collect the same debt, known as zombie debt. These methods include:
- Sending letters and making phone calls.
- Reporting debts to credit bureaus to affect credit scores.
- Hiring third-party collection agencies or law firms for more complex cases.
Debt Buyers vs Debt Collectors
Debt buyers and debt collectors are often confused but they play different roles in the debt collection process. A debt collector is hired by a creditor to collect a debt on their behalf. A debt buyer buys delinquent debts from creditors at a discount and then collects the debt themselves.
Here’s the difference:
- Ownership: Debt buyers own the debt they are collecting, debt collectors work for the original creditor.
- Motivation: Debt buyers want to collect as much of the debt as possible to make the most profit. Debt collectors want to collect the debt to get a fee from the creditor.
- Approach: Debt buyers may use more aggressive methods like filing lawsuits to collect the debt. Debt collectors use more traditional methods like phone calls and letters.
Knowing this is important for anyone in the debt collection industry, whether you are a creditor, a debtor or a professional in the field.
Why Buy Debt
- Big Profit: Debt buyers can make big returns by collecting payments from portfolios bought at a discount.
- Steady Income: Payments from debtors are regular income.
- Tax Write-Offs: Debts that are uncollectible can be written off and reduce taxable income.
- Diverse Investment Options: Portfolios can contain different types of debt, like mortgages, utility bills and medical debt.
Risks in the Debt Buying Business
Despite the profitability, buying debt has risks:
- Zombie Debt: Old debt that’s past the statute of limitations and can’t be collected.
- Legal Issues: Compliance with different laws to avoid fines and lawsuits.
- Market Volatility: Economic changes can impact the collectability of debt.
Debt Buyer Methods
Debt buyers use various methods to collect debt. These methods include:
- Sending Letters and Emails: Contacting debtors through written communication to remind them of their obligation.
- Making Phone Calls: Directly contacting debtors to discuss payment options and get payment.
- Filing Lawsuits: Suing debtors who don’t respond to other collection efforts.
- Reporting Debt to Credit Bureaus: Impacting the debtor’s credit score to get them to pay.
- Negotiating Settlements: Offering debtors the chance to settle their debt for less than the full amount owed.
Debt buyers also use technology like automated dialing systems and online platforms to make their collection process more efficient.
How to Win as a Debt Buyer
Winning in the debt buying business requires knowledge of the market and the laws. Here’s how:
- Research: Stay up to date with industry trends and laws.
- Build a Network: Connect with creditors, debt collectors and other debt buyers to get information and opportunities.
- Invest in Technology: Use software and online platforms to make your collection process more efficient.
- Have a Strategy: Create a plan for communicating with debtors and negotiating settlements.
- Stay Organized: Keep accurate records of your debt and collection efforts to comply and track progress.
By doing this debt buyers can succeed in the long run.
Your Rights as a Debtor
As a debtor you need to know your rights when dealing with debt buyers. Here are some of your rights:
- Fairness: You have the right to be treated fairly and nicely by debt collectors.
- Accurate Information: You are entitled to get accurate information about the debt, including the amount owed and the creditor’s name.
- Dispute and Verify: You have the right to dispute the debt and ask for verification.
- Negotiate: You can settle or make a payment plan with the debt buyer.
- Protection from Harassment: You are protected from harassment and abuse by debt collectors.
What Are Your Rights When Dealing with a Debt Buyer?
When dealing with a debt buyer you have:
- Request Documentation: You can request documentation and proof of ownership of the debt.
- Dispute the Debt: You have the right to dispute the debt and ask the debt buyer for evidence.
- Negotiate: You can settle or make a payment plan.
- Stop Communication: You can ask the debt buyer to stop contacting you.
- File Complaint: If you think the debt buyer is violating your rights you can file a complaint with the Federal Trade Commission (FTC) or your state’s Attorney General’s office.
Knowing and exercising your rights will protect you from unfair and abusive debt collection, and a fair process.
How to Become a Licensed Debt Buyer
For new debt buyers the industry requires planning and strategy:
- Business Entity: Choose an LLC or S Corp for liability protection.
- Banking and Software: Open a business bank account and invest in account management tools.
- Partner with Sellers: Work with debt brokers or creditors to buy good quality portfolios.
- Learn the Laws: Understand the FDCPA to comply.
- Sign up: ACA International / RMAi
Debt Buying Companies
- Encore Capital Group: Purchases charged off debts and works with law firms for collections.
- Portfolio Recovery Associates: Buys and collects consumer debts, including credit card accounts.
Debt Buying FAQs
What is a Debt Buyer?
A debt buyer is a company or individual that buys delinquent accounts at a discount and collects the balance from consumers.
How Do Debt Buyers Make Money?
Debt buyers make money by collecting more from debtors than they paid for the portfolios, often 2-3 times their investment.
Can Debt Buyers Negotiate?
Yes, debt buyers often settle or make payment plans to make it easier for debtors to pay off their balance.
End
The debt buying industry is profitable but requires knowledge, due diligence and ethical collection practices. New debt buyer or seasoned pro, stay informed and compliant to succeed in this industry.
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