Debt buying is part of the collections process, but understanding the role of debt buyers can be tricky.
What do debt buyers do?
The primary business of a debt buyer is purchasing debt from issuing creditors. These issuing creditors loaned money to a consumer who failed to make payments until the debt became delinquent. Once the issuing creditor determines that a debt is unlikely to be collected, they may choose to sell it to a debt buyer for a fraction of the debt amount. This benefits both the issuing creditor, who will recover at least a small amount of money, and the debt buyer, who now stands to make a profit on the debt if they can recoup anything from the consumer. Find out more about issuing creditors and how they operate.
Delinquent accounts are typically sold together in large groups called portfolios. Typically, debt buyers pay between $0.01 and $0.20 per dollar of debt. If a debt account is sold for $0.20 per dollar of debt and the debt balance is $500, for example, then the debt buyer would pay $100 for that account. Once a debt buyer purchases debt, they own the debt and keep any money they manage to collect. Debt buyers purchase a variety of debt types, including debt from credit cards, medical bills, mortgages, car loans, utilities, and more.
Negotiating with a debt buyer
Debt buyers may also hire collection agencies to help them recover money. If you are contacted about debt repayment, it is your legal right to request written verification of the debt. This will help you determine whether the debt is yours and if the person contacting you is the original issuer, a debt buyer, or a collection agency. An issuing creditor sometimes hires collection agencies to help them recover money, but ownership of the debt is never transferred to the collection agency. If the debt can be verified and the company listed is unfamiliar, therefore, then your debt was purchased by a debt buyer. If you’re dealing with a collection agency, read more about how they operate.
When negotiating with a debt buyer (or a collection agency working on their behalf), it’s important to remember that they paid very little to own your debt. Many debt buyers are willing to negotiate a new payment arrangement or a settlement far less than the original debt, since they can still earn a profit.
Also keep in mind the age of the debt and whether it falls within the statute of limitations. This refers to the amount of time in which a debt can be pursued. The statute of limitations varies by state and by debt type, but once the limit is reached, you have no legal obligation to repay the debt anymore. When this happens, the debt is considered “time-barred” instead. Consumers should be careful when dealing with time-barred debts, because making even a small payment on it can cause the statute of limitations to reset—making the borrower legally responsible for the debt again.
Pros & cons of debt buying
A major advantage to working with a debt buyer is the opportunity to find a flexible repayment arrangement. Whether this means a monthly payment plan or a lump settlement amount, the debt buyer paid far less than your original debt amount, so they are likely to strike a bargain. This can help you more easily repay your financial obligation and improve your credit score, since bad debts can remain on your credit report for seven years.
Debt buyers have gained a poor reputation for hassling consumers, and you may be subject to numerous phone calls and letters while your debt remains outstanding. There are laws in place, however, to keep debt buyers from acting unreasonably and dishonestly. The Fair Debt Collection Practices Act (FDCPA) prevents certain unethical tactics like pretending to work for the government, threatening to have you arrested, publicly shaming you, calling you outside the hours of 8 AM to 9 PM without your permission, and more.
The most important thing to do when faced with debt collection is to familiarize yourself with your rights, so you know what is required if someone contacts you. It’s also helpful to reflect and understand why the debt became unmanageable in the first place, so you can prevent the situation from reoccurring.
If you need help communicating with debt buyers, Kredit can help.