INTRODUCTION TO DEBT BUYING
Introduction to the Debt Buying & Debt Collection Business
Debt collectors are well-known, but debt buyers not so much. Few individuals are aware that debt buying is carrying on in the background. Yet, since investors operating alone or within companies recognize that debt buying can be an extremely lucrative business, there is an ever-rising demand in the industry.
This article is for you if you’re interested in debt buying and want to learn more about how to navigate it. From forming a business entity to doing the due diligence required to engage in atypical financial transactions, here we provide an overview of the key steps you should consider before becoming a debt buyer.
WHAT IS A DEBT BUYER & HOW DOES DEBT BUYING WORK?
A debt buyer is a company or individual that purchases debt from lenders or creditors at a discounted rate. Debt buyers are private or public companies, financial institutions, or investment firms that specialize in buying and collecting consumer debt. They purchase debt from creditors who are not able to collect payments from the debtors after a ~60-90 days. Once a debt buyer purchases the debt, they then become the current creditor and are responsible for collecting the payments from the debtor. The debt buyer will often purchase the debt for a fraction of the total amount owed by the debtor (pennies on the dollar). This gives the investor the opportunity to make a profit by collecting the debt at its full value. The debt buyer will then attempt to collect the debt in a variety of ways, including phone calls, letters, and even legal action. Once the debt is paid in full, the debt buyer will then be able to make a profit. This can be a very profitable business, but there are also risks associated with it. If the buyer is unable to collect the debt, they may end up losing money on the transaction. Additionally, debt buyers must adhere to all applicable laws, regulations, and ethical practices when attempting to collect a debt.
ELI5: A debt buyer is a person or company that buys existing debts from creditors (banks, credit card companies, etc.). They get the right to collect on those debts by paying for them. For example, if you had a loan from your bank and couldn’t pay it back, the bank might sell that debt to a debt buyer who would then contact you to try and get their money back.
When a company has unpaid debts that are past due, they may decide to sell the accounts off in order to recoup some of their losses. Debt buyers will typically pay less for this type of debt since there is a lower chance it will be paid in full. Once the debt buyer purchases the accounts, they will take ownership and have full legal authority to collect on them. All money collected from these debts goes directly into their pocket or, if you are acting as a third-party collection agency, you can negotiate to receive a certain percentage of what’s recovered.
WHAT IS THE DIFFERENCE BETWEEN A DEBT BUYER & A DEBT COLLECTION AGENCY OR DEBT COLLECTOR?
The major differences between debt buyers and debt collectors include:
- Purchasing Power – Debt buyers purchase distressed consumer loans for pennies on the dollar compared to what a creditor may originally accept for repayment; whereas a collector does not buy any outstanding balances – it simply takes over ownership of collection efforts from its clients (creditors). As such, debt buyers have greater purchasing power than most collectors because they can more easily purchase distressed consumer loan portfolios at deep discounts.
- Legal Authority – Debt buyers typically have greater legal authority than traditional collection agents since they own these past due accounts while collections agencies only act as representatives of creditors in trying to recover overdue amounts owed. Consequently, a collections agency may not be able to take certain measures such as suing customers or using wage garnishments without approval from its client (the lender), while a debt buyer has much more leeway when it comes to pursuing repayment through court action if needed.
- Revenue Potentials – Because of their larger investments into buying past due loan portfolios, debt buyers can generate higher returns compared with traditional collectors which generally earn less per account recovered versus what could be generated by selling off purchased receivables at market value after successful recovery actions taken against defaulted borrowers.
WHAT IS THE DIFFERENCE BETWEEN A DEBT BUYER & CREDITOR?
Debt buyers and creditors are two different types of entities involved in debt collection. A creditor is a company or person that extends credit to another party, usually in the form of loans or lines of credit. Creditors have the right to pursue repayment from borrowers through legal means if necessary.
In contrast, a debt buyer is an organization that purchases debts from lenders for pennies on the dollar when borrowers default on their payments. Debt buyers become the new owners of these delinquent accounts and can attempt to recover what’s owed by pursuing collections directly with consumers. Depending on state law, a debt buyer may be able to sue you over unpaid balances purchased from your original creditor—which could result in wage garnishment or frozen financial assets depending on where you live.
The difference between creditors and debt buyers boils down to who owns the account they’re trying to collect: With creditors, it’s still technically owned by them so they can take action according to terms set forth in their agreement with borrowers; whereas with a debt buyer, it has been sold off at a discount and now belongs solely to them—hence why they’re willing (and able) negotiate settlements for less than originally due because any money recovered would be pure profit for them at this point since their investment was so minimal upfront compared what could potentially be collected later on down the line after vigorous pursuit efforts have taken place via phone calls, letters sent out/received back as well as other forms communication (via email & text messages).
HOW DO DEBT BUYERS OR DEBT COLLECTORS MAKE MONEY?
Once a debt buyer purchases an account, they become the new creditor and assume all rights of collections on the account. The debt buyer usually pays fair market value for the outstanding balance with consideration to several factors such as:
- Age of the Debt – Older accounts tend to be sold at a discounted rate because anticipation of recovery is diminished;
- Volume/Size – Most debt buyers purchase accounts in bulk which allows them to negotiate discounts based upon quantity;
- Type Of Debt – Different types of debts have varying levels or recovery rates that influence their purchasing power.
After acquisition, the debt buyer has several options for collecting or recovering on these delinquent accounts: (1) They may choose to collect themselves using either internal personnel or third-party collection agencies; (2) sell off portions of their portfolio in order to raise additional capital quickly without having incur costs associated with first party collections; and/or (3) pursue legal action against borrowers who refuse to repay their debts. It should also be noted that some countries’ regulations require written consent by a debtor before pursuing legal action against them.
FIGURING OUT WHICH DEBT COLLECTION BUSINESS MODEL WORKS FOR YOU
The right business model for starting as a debt buyer or debt collection company depends primarily on the investments, resources and risks you can take. Generally, there are two main approaches: operating as a “debt buyer” or as a “third party collections agency”.
As a debt buyer, your role would be to purchase delinquent debts from other entities such as lenders, credit card companies, and other debt buyer at negotiated prices. Since this approach involves significant upfront costs (in purchasing bad debt), it generally requires greater financial resources and involves higher levels of risk.
On the other hand, if you choose to operate exclusively as an outsourced collections agency then your primary responsibility would be providing services necessary for recovering monies owed by customers who’ve defaulted on their loans/accounts held with other financial institutions. This includes contacting customers via phone calls & emails; conducting skip traces; submitting lawsuits & garnishments or establishing payment plans if needed—all without having to ever invest in purchasing bad debt yourself. While this route is usually less risky overall due to avoiding large upfront investments typically involved with buying delinquent accounts outright – it’s also worth noting that returns will likely be smaller in comparison given that most agencies get paid only once recoveries have been made successfully and the average percentage that you’d keep is around 30-50%.
COMMON TYPES OF DEBT AVAILABLE TO BUY IN THE SECONDARY MARKET
- Credit Cards (consumer and retail)
- Storefront Payday Loans
- Internet Payday loans
- Student loans
- Overdrafts (DDA)
- Bad checks
- Auto loans
- Bail bonds
- RTO (Rent to own)
- Gym Memberships
Which type of debt is the best to collect on?
Pros and cons of different types of debt:
Credit Card Debt:
Pros – Credit cards typically have higher balances, meaning there is more money that can be collected.
Cons – Most debtors are not able to pay large sums of money up front and will require payment plans.
Payday Loan Debt:
Pros – Payday loans typically have lower balances, so you get more accounts for the dollar amount that you invest as a debt buyer. Additionally, payday loan lenders usually don’t utilize aggressive collections tactics, so they are easier to deal with than credit card issuers or other lending institutions.
Cons – Although the balances may be smaller, depending on the lender there could be high interest rates attached making this type of loan less profitable in some cases.
Auto Loan Debt:
Pros – Larger balances.
Cons – Many auto dealerships use their own team or third-party agencies specialized in repossessing cars so the debtor may feel as if the debt has been satisfied since they are no longer in possession of the vehicle
Pros- The borrower pays over an extended period giving the debtor ample opportunities for payments unlike short term loans like payday advances where full repayment needs to happen immediately.
Cons– The reduced amount due per installment creates low account charges making this option not very profitable unless multiple accounts are bought at once.
Pros– Unlike most revolving debts here arrears aren’t charged additional late fees.
Cons- These types of debts are usually much smaller requiring large volumes to acquire meaningful profits
Overall, we recommend focusing on collecting from payday loans since they offer manageable balance sizes averaging between $300-$600 excluding interest.
SETTING UP THE BUSINESS
As a new collection agency startup, it is important to consider the type of business entity that will best suit your intended activities. Depending on expected income levels and how you want to protect your personal assets in case of lawsuits, a Limited Liability Company (LLC) may be the easiest option as it has lower compliance requirements and fees throughout the year. However, if you plan to carry over losses or invest heavily in promotional campaigns with uncertain payoffs, then forming a corporation might be more beneficial for tax efficiency purposes. Ultimately, consulting an attorney before deciding which entity type is optimal can support you in making an educated decision based on individual tax situations.
DEBT COLLECTION LICENSING LAWS & REGULATIONS
In order to operate a debt collection business, it is important that you are aware of and comply with the licensing requirements of each state or jurisdiction where you will be collecting debts. Make sure to research applicable laws and regulations for corporate entity structure as well as licensing and permit requirements before setting up a debt collection agency.
FDCPA – Fair Debt collection Practices Act
CFPB – Consumer Financial Protection Bureau
A great resource is Cornerstone support, a company specializing in licensing for ARM companies: https://cornerstonesupport.com/licensing/
As a new collection agency startup, it is essential to be familiar with current laws and regulations from the CFPB (Consumer Financial Protection Bureau), FDCPA (Fair Debt Collections Practices Act), GLBA (Gramm-Leach Bliley Act), and TCPA (Telephone Consumer Protection Act). These regulations are in place to provide debtors with protection against predatory and aggressive practices by ensuring all collection agencies collect debt according to certain policies. Furthermore, understanding the different rules for each regulation can help protect your business from significant fines due to noncompliance. For example, under the FDCPA it’s illegal for collectors contact third parties or use abusive language or harassing tactics in an effort to recoup a consumer’s debt. As such being knowledgeable about these laws will not only keep you out of legal trouble but ultimately benefit your company as well by helping ensure successful resolution of debts owed efficiently and ethically.
DEBT COLLECTION SOFTWARE & TOOLS
Most collection agencies have advanced debt collection tools, one of which is skip tracing. Skip tracing software is a great way to avoid issues with out-of-date data by exposing a person’s details such as address history, phone numbers, relatives, associates, and contact information directly from the Credit Bureau.
It is important for new collection agencies to have a collection focused CRM to streamline their operations and ensure maximum efficiency. A good CRM system will enable you to stay organized, track contacts, create detailed notes on interactions with accounts and debtors, manage compliance requirements such as the Fair Debt Collection Practices Act (FDCPA), generate more leads through automated processes, analytics, integrate with third-party payment processors and other software systems like QuickBooks. With a collection focused CRM system in place, you can be assured that all of your data remains secure while still being easily accessible when needed. Additionally, having this type of system makes it easy for agencies to scale up quickly as they grow without any significant disruption or additional costs associated with adding new staff or technology infrastructure.