When it comes to buying debt, it is crucial to be prepared. If you do not know what to do, you are likely to make mistakes that will end up costing you a fortune. The good news is that this ultimate guide to buying debt will equip you with all the information you need to get started on the right foot. Bookmark this guide so that you can keep coming back to it to brush up on your knowledge. It is a great time to become a passive debt investor.
Now, you need to keep in mind that the debt sales industry is cyclical due to various factors, including the availability of funds, consumer debts, the number of debt purchasers, and the regulations. As the debt collection environment is becoming friendlier, you must take advantage of the present opportunity.
Even if the government regulations are strict under a democratic regulation, it does not mean that you should single out the option to invest. Many debt purchasers are consolidating or simply going bankrupt because of such regulations, which have resulted in many original creditors being nervous about selling to outsiders.
Fast forward to the present, and there are fewer purchasers in the market than ever before. This is why there is less competition and plenty of AI tech collection firms servicing accounts efficiently. Now that you are more aware of the current climate, you will have an easier time making the most of this guide. Read on to learn about everything that you need to know about becoming a passive debt investor.
What Is A Debt Buyer?
Before we dive deep into buying debt, it is important to understand what a debt buyer is. In the simplest of words, a debt buyer is an individual, company, or group that buys performing and non-performing receivables or loans to collect the amount more significant than the purchase sales price over a period of time to make a significant profit.
Creditors, Small companies, and banks sell outstanding loans which you can purchase. The quality of the loans ranges from secured, large-balance, well-performing loans, like mortgages, to non-performing, charged-off, unsecured loans. Although other debt buyers might own a licensed collection agency, the debt buyer purchases do not usually collect from the purchase accounts and outsource the job to a licensed agency instead of reducing the risk.
Where Should You Start?
Since it is your first time buying debt, you are unlikely to know where to start. All you need to do is start researching the types of consumer debts that you are interested in purchasing. You might have some experience with a specific kind of debt class, for example, credit card debt. Besides this, you could contact a group that sells consumer debts. It is wise to reach out to other largest debt buyers and sellers to determine the market conditions. It will help you get an idea of the value and purchase price.
Since it is your first time buying debt, you are unlikely to know where to start. All you need to do is start researching the types of consumer debts that you are interested in purchasing. You might have some experience with a specific kind of debt class, for example, credit card debt. Besides this, you could contact a group that sells consumer debts. It is wise to reach out to other largest debt buyers to determine the market conditions. It will help you get an idea of the value and purchase price.
Purpose
When you become a debt buyer, you need to make a few decisions to influence your debt buying processes. Before you can do proceed, you must first define your purpose behind buying. It could be anything from buyer's agent, purchasing for brokerage, purchasing for third-party debt collector, and purchasing in-house debt collections to a combination of any of the points. Only when you have a purpose would you be able to pursue debt buying adequately.
Consult with the Right Party
Any person or group that lends money should be able to sell debt. Suppose they are interested in a debt sale. In that case, a price should be negotiated depending on the market conditions, the time of collections, the likelihood of down payment, credit history, credit score, money owed, monthly minimum payments, credit reports, auto pay ACH, collections, the age and type of debt such as if it is classified as a credit card, and how long it has been pursued you should also go to market and see if comparable sales for that type of debt and asset class.
Before you decide to buy debt, you should reach out to see the asset classes the third-party collection agency specialized in and the amount they charge for an account. They should help provide you with a clear breakdown regarding the specific age and debt type they collect from.
You also need to gather the following information:
- Asset Classes
- Industry References
- Liability and Errors and Omissions Insurance
- Length of Time in Collections
- Liquidation Rates of the Most Recent Portfolios
- Contingency Rates
Determine Which Type of Debt You Want To Work With?
Whenever a debt is created, and most purchase contracts back it stating that the debt can be outsourced or sold, it is available for purchase as long as you use the right channel. There are various types of old debt that have different laws governing their sale and collection process. This is why it is crucial to check out the relevant regulations for every other type of debt in your state. Some debt is much easier to market for and liquidate. It would be best to learn about the different types of debtors you would deal with and get a grip on the laws. Since laws vary based from state to state, you need to look into the regulations applying to your state. Generally, the following types of debt are available for purchase, so you can get with seller finance with a down payment and make monthly minimum payments or upfront closing costs or earnest money deposits.
- Payday Loans
- Installment Loans
- Personal Loans
- Bail Bonds
- RTO (Rent to Own)
- Credit Card Companies
- Largest Credit Card Issuers
- Retail Accounts
- Bad Checks
- DDA (Checking Account Overdrafts)
- Student Loans
- Utility Bills
- Auto Deficiencies - Automobile Loans
- Mortgage/ Property Liens
- Default Judgment s
Corporate and Legal
Becoming a debt buyer also requires you to incorporate to ensure safety. An LLC (Limited Liability Company) is the most common type of entity in the debt purchase industry. " save money " Besides, it is straightforward to file as there are fewer requirements. It will provide you with a fantastic starting point. But, collection agencies with monthly debt-buying budgets would find the S Corp to be ideal. In contrast, the C Corp would be better for debt buying entities that expect to invest in expensive marketing campaigns which would offer inconsistent revenue or make a large purchase wherein losses are expected to be carried over through the fiscal year.
Licensing and Bonding
An essential fact that you need to keep in mind is that not every state requires a license or bond to start collections from debtors in that state. But, it is always better to be licensed in the state regardless of your operations. In certain conditions, it would be illegal to operate without first having a license. Hence, you must make sure that you have a permit. Look into the state requirements to learn more. The following are some of the states that do not require you to get a bond or license. Laws change all the time, so you should still countercheck.
- California
- New Hampshire
- Vermont
- Pennsylvania
- Virginia
- South Carolina
- Georgia
- Ohio
- Kentucky
- Mississippi
- Oklahoma
- Missouri
- South Dakota
- Montana
What Should You Look For In A Debt Portfolio?
After establishing which type of debt you plan on purchasing and establishing a relationship with a debt collection group such as collection law firm, you will need to sign a non-disclosure agreement NDA or MCND.
After the agreement has been executed, the debt seller or lender would deliver a masked portfolio copy. However, certain debtor identification information would be removed, such as names. Some of the data that you need to evaluate from the masked file is mentioned below.
Original Issuer/ Creditor
It would include the name of the original credit issuer. If it is a credit card company or a lending institution, it would be the lending company's name. On the other hand, if you buy bad checks, you would see the name of the ACH processing company or the check guarantee company that processes the transaction. The bank's name will be mentioned if you buy bank overdrafts (DDAs or credit card). Thus, you would know about who originally owed the debt before it was sold into collections or charged off.
Type of Debt
As you already know about the types of debt available, as mentioned above, you would know that the kind of debt would include credit cards, bank overdrafts, installment loans, fha loans, real estate, or any other type of debt.
Face Value
The term is used for the total principal balance of each account included in the portfolio. The price of the portfolio would be calculated based on this. Now, if the portfolio has already been through at least one agency, the value might be calculated based on the current Balance. It would include the additional fees that have been incurred by additional agencies or interest calculated by those agencies.
Number of Accounts
This is self-explanatory. It is the total number of accounts that are included in the portfolio.
Average Balance
It refers to the mean face value of the accounts. It is calculated by dividing the face value by the number of accounts in the portfolio. It will provide you with a median balance of the accounts.
Average Charge-Off Date
The average charge-off data is the date on which the original creditor charged off the account. It is normally 2 to 6 months after the open date.
Post Charge off Agency
The term refers to the number of collection agencies that have dealt with the debt portfolio. The more the collection agencies that have worked on the portfolio, the cheaper the portfolio. Debt tends to liquidate best by the first agency. Its possibility only decreases with each agency.
Shelf Life
Shelf life means the amount of time it has been since the last collection attempt was made. This is calculated by considering the last worked date.
Credit Report
Ask if the delinquent debts have been reported to the credit bureaus; if so, how long before charged off.
Chain of Title
It is a comprehensive list of the entities that have worked with the debt portfolio. The Chain of Title would not be available for viewing unless you have purchased the portfolio. However, it might be mentioned. It would help if you inquired with the seller to gather the necessary information about the portfolio's history.
Media
The debt portfolio does not always include media such as account statements original applications agreement. But, portfolios that do contain media are much easier to liquidate on. Thus, such portfolios would be more expensive. Media includes driver license photocopies, check images, original contracts, and any other document which would link the debt with the debtor.
Price
Finally, you would also come across the price of the portfolio. When you review the cost of the portfolio, you will see numbers such as $0.01 or $0.0065 bps. It is the amount that you would pay on each dollar of the debt. For instance, if the portfolio that you are interested in purchasing has a face value of $1,000,000 (One Million Dollars) and the ask is $0.02 (Two Cents), $20,000 would be the sale price portfolio.
Ask for Sample Media
If the seller does not provide you with sample media of the portfolio and a copy of the Chain of Titles, you need to request the same before signing NDA. The seller has to fill out a survey that would cover the bad debts they are interested in selling.
The survey would also include information about the employment history of the debtors, how the original creditor underwrote, the asset class, and so on. It is also essential to know about the number of agencies the seller has outsourced to and its length. Besides this, you need to determine the settlement authority that each agency has had. Only when the purchase has been completed would be seller deliver the unmasked file, which would contain all the information about every debtor, such as their full name, original account number, address, date of birth, and social security number. After establishing which type of debt you plan on purchasing and establishing a relationship with a debt collections group, you will need to sign a non-disclosure agreement.
Sample Portfolio Listing
To help you understand what to expect when you buy collect debt, we share a sample portfolio listing that covers three different portfolio listings. The information transmitted below includes the names of fictitious collection agencies, debt brokers, and lending institutions. The only purpose of the data is to help you understand what you will encounter along the way.
Portfolio Offerings:
Creditor: More Money Lending
Debt Type: Subprime Credit Card debt
Number of Accounts: 1,500
Face Value: $2,100,000.43
Charge Off: 01/01/2019
Agency: 1
Media: Contract + Statements
Average Balance: $1400.21
Price: $0.04
Equal = $ 84,000.10
Creditor: Bank of USA
Debt Type: DDA - Demand Deposit Account
Number of Accounts: 30,000
Face Value: $13,629,600
Charge Off: 11/03/2017
Agency: 2 ag recall
Media: Yes – via digital .pdf
Average Balance: $454.32
Price: $0.025 or $0.03 cents
Creditor: AUTO BANK USA
Debt Type: Auto Loans
Number of Accounts: 606
Face Value: $4,873,334.65
Charge Off: 07/02/2013
Agency: 3
Media: Yes – Upon Request
Average Balance: $8,055.09
Price: $0.003 - 55 bps
Liquidation
To decide how to liquidate a portfolio is by checking the agency's performance. Liquidation will determine the investment criteria regardless of whether you plan to outsource all your stale debt s or purchase the portfolio for debt collection agencies.
For instance, the debt buying collection agency can purchase a portfolio that is worth $1,000,000.00 at face value to collect on.
If the portfolio is purchased for about 1.5 cents, the cost of the portfolio would be approximately $15,000.00. You would need to liquidate at about 1.5 percent plus the operating costs.
After you start documenting the agency performance, you would see trends that the in-house agency can liquidate at about 8 percent over the portfolio's life cycle.
It would cost 1.5 cents for each dollar. Therefore, the hypothetical liquidation/ purchase of the $15,000 portfolio would be $20,000 after a few months of collection. It could be re-sold for half of what you paid for it after shelving for several months.
It is vital to understand how well you can liquidate depends on the state laws. It might not be possible to send letter campaigns, work with $1,00,000 worth of debt for over a month, or even use phone calls, predictive dialer, automated, opted-in SMS, ringless, etc. . Hence, you must first learn about the state laws in place.
Now, if you opt for a third-party collection agency, you would need to pay a 50 percent commission. Therefore, you would get half of the amount collected. Moreover, the waiting period would increase to 6 months or even a year for its resale value to decrease to just 1 cent. After you gain an understanding of the way debt liquidates, you can tailor your debt purchasing accordingly. It will enable you to come up with the most effective debt purchase strategy.
The third-party agency will offer liquidation rates on portfolios similar to the ones you plan on purchasing. Liquidation is always the bottom line. Simple math will help you ensure a profitable purchase.
Debt Buyers Red Flags
When vetting potential debt portfolios, there are some major red flags that you need to be on the lookout for.
1. Debts Which Have Passed SOL (Statute of Limitations)
One of the significant red flags you have to watch out for is debts passed SOL (Statute of Limitations). You must understand the SOL for time-barred debt. Since it varies depending on the state, you need to look into it. Once a certain period of time has passed, and the debtor has failed to make payment as defined, you cannot sue them for recovery.
In fact, most states consider this zombie debt s as legally uncollectible through other means. To maintain good relations with debt sellers and prevent fraud, you need to be careful when conducting due diligence. Debts that have passed the SOL cannot be purchased without proper due diligence.
2. Incomplete or Fake Chains of Title
Next, you also need to be careful of incomplete or fake Chains of Title. It is the documentation that reveals the bills of sale. The document must be complete. The document should mention the sale of the debt from the originator to the very first purchaser. Each bill of sale needs to be available to cover all the sellers. You must verify each seller to determine their ownership of the debts. Since incomplete or falsified chains of title are to blame for most of the fraud that has been committed over the past few years, you must check the chains of title carefully. An incomplete or falsified chain of title is where the debt collectors cannot prove the respective owners of the debt which they are offering. The seller must provide a warranty and represent the information in the document as correct.
Top Tips for Buying Debt
Although not every broker is bad, brokers do end up with bad portfolios. This is why you need to make sure that you are not taken advantage of. Besides, established and experienced agencies know exactly what they buy. Therefore, you have to be careful. The following tips will help you purchase debt.
- If you find a broker pushing a file on you, the chances are that there is a reason behind it. You would be surprised to know how many times newbies are taken advantage of. Hence, you cannot let brokers push a file on you.
- Keep expectations low as it takes years to understand how things work. You would only end up getting discouraged if you have high expectations.
- Being a new debt buyer owns you at a disadvantage, so you need to do as much research as possible. However, horrible portfolios will come your way.
- Do not fall for the "We only have a minimum of $10,000 and it is not possible to get you anything worthwhile for just $3,000 ".You will need to start with a smaller sample first and move your way up. Once you have more acquired and expertise, you can take up bigger portfolios that you save money if you buy more.
- Make sure to network and learn as much as possible from mentors. It will help prepare you for the field. However, it does not mean that everyone is going to look out for you. If someone does not care about draining your startup cash, they simply do not care about your wellbeing and should be avoided.
- Avoid buying debt over social media. Even if you are a member of a private group, you still need to be careful.
- In addition to avoiding social media for purchasing debt, you also should not buy debt from strangers. Look out for companies that have a generic name. There are plenty of scam companies. However, when you are careful, you should have no trouble avoiding them altogether.
- When buying debt, you should always take your time and avoid purchasing debt impulsively. It is only a recipe for disaster. With a trusted network to fall back upon, you can seek help when looking through a masked file. There will be someone who will help you. It will go a long way since you cannot just rely on Google to help you all the way.
Regulatory Organizations
No guide to buying debt would be complete without providing information about the regulatory organizations that are in place. Various organizations ensure accountability and support ethics. They help set the standard. To ensure that you find the correct accounts receivable management company, you need to make sure they are registered with or belong to the following organization.
Industry Trade Groups & Government Bodies - Debt Buying Industry:
- Receivables Management Association (RMAi) Previously Called the DBA (Debt Buyers Association)
- Better Business Bureau (BBB)
- The Association of Credit Collection Professionals International (ACA International)
- Consumer Financial Protection Bureau (CFPB)
- Fair Debt Collection Practices ( FDCP )
- Federal Trade Commission (FTC )
Other P
ortfolio Recovery Associates Websites:
- AccountsRecovery.net
- Debtconnection.com
- Search Receivables. Info
- insidearm.com
Top Debt Collection Agencies:
- Encore Capital Group
- PRA
The abovementioned organizations strive to promote ethics and professionalism in the delinquent debt buying and debt collections industry. The ACA and RMAi have memberships of both collection agencies and debt-buyer agencies. They even have personal membership levels. The organizations sponsor networking events, conferences, and educational events with certification courses that educate members to improve the debt industry and uphold the highest principles. To inquire about benefits and membership, you can contact them directly.
As a debt buyer, you should feel more comfortable purchasing debt from registered and certified companies by the ACA and RMAi. You can rest assured that both organizations maintain the best ethics. Their members are proud of the principles they stand for and what they do. However, it does not mean that some bad actors have simply obtained the certifications without any intention to uphold the principles. You have to build relationships with experienced industry professionals through networking.
As for the BBB, it is a privately owned company. It depends on a consumer debt complaint system for grading companies on a scale of A+ to F. Therefore; the company acts as an intermediary between businesses and consumers. It ensures that the information is freely available to the public to ensure that the consumer experience is improved. An annual fee needs to be paid to become BBB Accredited. However, the fee can also be broken down into monthly installments. The organization also requires you to act ethically and professionally. When you show customers that you are BBB accredited, they get to trust you as they know that your company web site information is available to the public. Thus, customers can reach out and share their experiences so that your business is held responsible for quality assurance.
Finally, there is also the CFPB. It is an independent regulatory agency that the US government governs. It is responsible for ensuring customer protection in the financial sector. Recently, the organization has become very much involved in the debt buying and debt collection industry. It has helped clean up the industry and reformed bad debt purchase and collection practices. The consumer protection has worked with the FTC to ensure that companies and individuals who exploit customers or follow unethical/ illegal activities are investigated and abstained from doing business in the accounts receivable management industry. Therefore, it has put an end to a pattern of wrongdoing and maintains an industry where the right practices are followed.
Due Diligence
Due diligence is not the same as research. It involves taking reasonable steps to satisfy legal requirements when purchasing or selling something. It can also be defined as doing your homework. When it comes to the debt buying process, it is one of the most important steps that you cannot ignore. Debt buyer paid need to conduct due diligence as they need to understand that it will not be a system that will protect their investments if they are not careful. Hence, you need to look into who you buy from and who sources your debit purchases. Choose an agency that has a strict debt purchasing process. They should provide you with a Sales List. It should mention the names of debt sellers.
It all comes down to trial and error. Only with extensive referrals and networking can you be sure about your purchase. Startup owners do not have the capital needed for trial and error. This is why you must only deals with debt sellers with registration with the ACA or the RMA, or both organizations. It will help ensure that you experience the best buying process. You can check out Debt Connection to learn more about other companies or aaccountsrecovery.net
Importance of Research and Planning
Now that you know more about due diligence, you need to dig deeper. To ensure effective debt investing, you have to conduct proper research and planning. There is no other way to it. If you are willing to put in the work, you should find success. Just like any other financial industry, this industry also had its pros and cons. You need to be willing to put in the effort to succeed. When you research and plan, you get to make sure that you take the best step forward.
There are plenty of scam companies that will discourage you and hinder you from following your passion. However, it does not mean that you should give up. Instead, you can give them a tough time through your research and planning. Learn as much as possible about each company and individual that you work with. Ask for recommendations and speak with as many people as possible before signing any agreement. You need credible sources to be able to trust someone.
Once you continue researching and planning, you will get to prepare your very own list of debt sellers. You can rely on this list for all your future debt purchases. Some recommendations and references should back up each name on the list. You need to consult with a mentor if possible to proceed in the right direction.
Finally, before this guide comes to a close, it is vital to mention the importance of using omnichannel debt management for improving the debt purchase and collection process. As people today have become tech-savvy, you should keep up. Outdated debt purchase and collections techniques will only get you nowhere. If you genuinely want to make a name of your own, you need to adopt an omnichannel approach to debt management. The following reasons highlight why every new debt buyer should follow an omnichannel strategy.
1. Single System
One of the great things about omnichannel debt management is that it provides a single system that you can utilize to ensure that you are fully capable of taking on the work. It will give you the tools needed to complete work. As you would have all of the tools in a single place, you can utilize them for boosting productivity and getting a 360-degree view of all your debts. The system will require you to enter details of the portfolio to analyze it better and target debtors later on for collection.
2. Predictive Dialer and Voice Portal
Next, the omnichannel debt management software also comes with predictive dialer software and an online payment portal. It utilizes artificial intelligence and machine learning to automate repetitive tasks. Even if you have a small team, you can get more done by turning to the software. It will streamline the debt collection process so that your team does not need to dial every number. The dialing and sending of voicemail will be taken care of by the software. It will ensure that the agents only receive a call from an individual once the call is answered. This would help boost efficiency and ensure that agents are more productive during calls. Often, customers only require a proactive approach, and with the software in place, you can handle their demands.
3. Enhances Workflow
When it comes to collect debts, not every customer is the same. Since each situation is different, you need to ensure that various channels are utilized for the best results. It includes a phone, ringless, video, online chat, mobile app, SMS, and email. Once you have taken on a portfolio, your best bet is to utilize an omnichannel debt collection agency to ensure success. The software will identify actions that help trigger the desired results.
4. Effective Campaign Manager
Using an omnichannel tool will also provide you with an effective campaign manager, which you can take advantage of to optimize the possibility of debt collection. It will analyze contacts to see which ones are worth pursuing. You can use the reporting and monitoring tools to get a comprehensive view of the debt collection right from the contact center dashboard. It will also identify how you can improve your performance. With analytics, you get to boost debt recovery rates. Artificial intelligence, algorithms, big data, and BI tools have made it possible to take your efforts to the next level. From decreasing the abandoned calls to boosting the recovery agreement rate, you have to give the software a try to see how you can achieve much more than you possibly imagined.
Conclusion Debt Buying is a Risky Business:
Once you have gone over this guide, it is essential to note that you must do your research before you make a debt purchase. The guide only serves as a general reference for new debt buyers purchase. The information mentioned here can change with time, such as in the case of state laws.
Joining the debt buying and debt collection industry can be highly rewarding. Even though it is risky and has a negative connotation, you should still succeed if you take advantage of the guide and remain careful.
The industry only has a bad name because the few have exploited the industry for their gain. Their lack of understanding of the regulations and ethics does not mean that the industry is not worth pursuing. You should always be mindful of whoever you deals with. Practice ethical, legal, and honest business to avoid getting in trouble. There is a lot that you can do to succeed.
Call us to discuss and register review our latest portfolios or our sales services! Visit our website at www.fitzgeraldadvisors.com