Buying bad debt has become a new source of profit for many agencies, not just debt collection firms. Understanding the potential for profit, a large number of investors have sought to buy the rights to delinquent debt portfolios from companies such as banks, credit card agencies, and even health care providers, realizing there is money to be made when these accounts can be acquired for such a small cost.

How it Works

The individual or company buying bad debt bids a fraction of the actual total debt due to purchase the account. The creditor agrees to the sale, desperately in need of cash for their own business functions and no longer having the resources to pursue unpaid debt.

Most of the time, the purchaser can buy the bad debt for pennies on the dollar. Spending only a fraction of the actual potential for financial reward allows the investor an opportunity to reap the fruits of a small amount of labor.

In the exchange, the creditor receives a portion of the debt owed so they have capital for business use, and the debt collection responsibility falls to the debt purchaser. There are two ways in which the debt purchaser can choose to obtain a profit from the debt they purchased.

Repackage the purchased debt and sell the new portfolios to debt collection agencies for a small profit. The agency will attempt to recover the full amount of money due, profiting on their purchase, while the debt buyer has already made a hefty sum. This is known as passive debt buying.

Pursue the debtor to collect funds themselves. This requires more work, and often, the purchasing agent doesn’t have the same incentives as the original creditor. However, if the agent decides to collect the delinquent debt through his or her own resources, the potential for profit could be phenomenal. This is known as active debt buying.

Why it Works

The reason buying bad debt works is because everyone involved is satisfied with the outcome. The creditor who sold the portfolios has recovered working capital for their own business, and any collection agency involved will be grateful for the opportunity to increase their own profits through debt collection practices.

The debtor can take advantage of the fact that the new collector didn’t pay ‘full price’ for the debt and typically manages to satisfy the debt for a much lower sum, wiping the slate clean. As for the debt purchaser, the potential for financial gain is limitless, with multiple options from which the buyer can find a way to make money on the purchase.

Also, explore more important facts and resources on business debt collection, in addition to commercial debt collection options.

In the last article of this series I described two different sorts of collection agents: in house collectors and third party collectors. In house collectors work directly for the creditor, while third party collectors work for a collection agency hired by the creditor to collect on delinquent accounts. I mentioned that third party debt collectors are bound by the rules and guidelines of the FDCPA, while in house collectors are not. The FDCPA stands for Fair Debt Collection Practices Acts and it is full of strict guidelines that third party collection agents must follow.

So, as you can imagine, many lawsuits spring up due to complications and confusions regarding debt collectors and the rules they must abide by: are they in house, or third party? Last article I brought up three examples, one being the Department of Education collecting on student loans. Anyone who works directly for the Department of Ed is not bound by the FDCPA, while the seventeen private third party collection agencies that it works with are. I mentioned a law suit about a hospital that sent out pre-collection notices to patients with medical debts. If the hospital was ruled a third party collector, everyone who received that notice would have been absolved of their debt. In this case the hospital was ruled a creditor instead.

Finally, I brought up a personal situation I encountered with an in house debt collector that is kind of silly and ridiculous but pertinent nonetheless. I am notorious for taking out books from my local library and never giving them back, so last summer it got to the point that they sent a collection agent after me! The collection agent called my third party house phone and left a message for everybody to hear about the intimate details of my “delinquent account,” and ask that either I return the books or pay the library for the cost of them. Fortunately for them, I love my library and was also aware of the fact that the collector was an in house, because she requested that I pay the creditor (the library) directly. I gave the books back, but let it be known that if I did not manage my finances as well as I do now, and had been called by a rude third party debt collector who did the same thing; there would have been hell to pay.

To determine if they are work with third party debt collectors or in house collectors in court cases, the courts will take a lot of ideas into consideration to rule if the FDCPA applies or not. If the creditor hired a collection agency outside of its company, the agency’s participation in the actual debt collection process must be minuscule. Questions the court will ask include: is the collection agency only a mailing service? Do they letters say if the debtor does not pay the debt will be referred for collection? (Third party collection agencies send out different letters, in house collectors send out these “warning” letters.) Is the collection agency only paid for sending letters?

If the collection company is paid on commission, it is probably a third party collection agency. Again, if the agency gets the payments and then forwards the payments to the creditor itself, it is probably a third party collection agency. If a debtor does not respond to the letter and the collection agency has no further contact with the debtor, or if it does not get a hold of the files on the debtors, it is most likely not a third party collection agency. The lesson to be learned here is that when it comes to personal finance, it is important to know who you are giving your money to. A simple question as to whether you are speaking with a third party debt collector or an in house collector can guide the conversation because you will know their limits, like in the case of me and the library, or all of those people in the hospital that might have gotten away with not paying their medical bills.

Mallory Megan works for Rapid Recovery Solution and writes articles on commercial collection agencies This article, The Difference Between Third Party And In House Debt Collectors And Why It Pays To Know Who You’re Paying Part Two has free reprint rights.

A third party debt collector may call the debtor’s place of employment, but they are limited in what they can disclose. They are not allowed to tell an employer about a debt, or to try to get a debtor fired. Generally, a collection agent is prohibited from discussing your debt with anyone but you and the credit bureaus, however in some states speaking with a debtor’s spouse is permitted.

While it may not be the greatest idea, according to the Fair Debt Collection Practices Act, a debtor can tell a collection agent in writing that they would like to cease further communication and the debt collector must comply. The collection agent is generally allowed one more contact to inform the debtor how they intend to proceed with their case. While ceasing communication with debt collectors might seem relieving, it is essentially relinquishing control over your financial situation, and a debt collector is still fully capable of negatively marking your credit score or taking you to court.

The request to cease communication must be written, preferably citing the FDCPA and sent by Certified Mail, Return Receipt Requested. If a creditor was on the fence about whether or not to file a lawsuit against the debtor, the decision will usually be made right after this point, instead of being further delayed.

Again, just because the collection agent can no longer contact you anymore does not make the debt disappear. After a debtor has mailed a “cease and desist” notice to their collection agent, their debt will either be returned to the original creditor, passed on to another third party agency, or in rare instances, filed away simply as uncollected, all depending on the circumstances.

Try to remember however, when the debt collector calls, they often have the authority to offer you a repayment plan or a reduced amount to pay, which will absolve you of your debt so you don’t have to worry about it anymore, and make it easier for you to pay. Although they get a lot of bad press, most debt collectors are for the most part friendly and more than happy to work with you if you want to work out some sort of payment. It’s a win-win situation for both parties: your debt has been paid and the collector gets a nice commission check for the week to bring home.

Mallory Megan works for Rapid Recovery Solution and writes articles on nationwide collection agencies Check here for free reprint licence: What If I Want A Debt Collector To Stop Calling Me?.