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In the financial industry, debt collectors are a familiar presence, but the role of debt buyers remains less known. Debt buying operates behind the scenes, yet it’s a growing sector as both individual investors and companies recognize its potential for high returns. If you’re interested in entering the debt buying market and seeking guidance, this article will provide you with a basic overview, covering everything from establishing a business entity to performing due diligence for purchasing bad debt, also known as charged-off debt.
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What is a Debt Buyer and How Does Debt Buying Work?
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A debt buyer is an entity that purchases debt from creditors or lenders at a discounted rate. This can include private or public companies, financial institutions, or investment firms specializing in consumer debt collection. They buy debt from creditors unable to collect payments from debtors after a certain period, typically 60-90 days. Once the debt is acquired, the debt buyer becomes the new creditor responsible for collecting payments from the debtor. The profit potential lies in purchasing the debt for a fraction of the total amount owed and then collecting the full value.
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Key Points:
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- Debt buyers can be individuals, companies, or investment firms.
- They purchase debt at a discounted rate, often pennies on the dollar.
- Profit is made by collecting the debt at its full value.
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The Difference Between a Debt Buyer, a Debt Collection Agency, and a Creditor (Debt Seller)
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Debt Buyer vs. Debt Collection Agency:
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- Debt buyers purchase distressed consumer loans at deep discounts, while debt collection agencies take over collection efforts without buying the outstanding balances.
- Debt buyers have greater legal authority and can pursue repayment through court action if needed, unlike collection agencies that need approval from their clients (creditors).
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Debt Buyer vs. Creditor:
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- Creditors extend credit and have the right to pursue repayment, while debt buyers purchase defaulted debts from creditors at a discount and become the new owners of the accounts.
- Debt buyers can negotiate settlements for less than originally due, as any money recovered is pure profit due to their minimal upfront investment.
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Debt Collection Licensing Laws & Regulations
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Operating a debt collection business requires compliance with licensing requirements and regulations in each state or jurisdiction where you’ll be collecting debts. Familiarize yourself with the Fair Debt Collection Practices Act (FDCPA), Consumer Financial Protection Bureau (CFPB) regulations, Gramm-Leach Bliley Act (GLBA), and Telephone Consumer Protection Act (TCPA) to ensure legal and ethical collection practices.
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Useful Resources:
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FDCPA – Fair Debt collection Practices Act
https://www.ftc.gov/legal-library/browse/rules/fair-debt-collection-practices-act-text
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CFPB – Consumer Financial Protection Bureau
https://www.consumerfinance.gov/
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A great resource for collection agency licensing is Cornerstone support, a company specializing in licensing for ARM companies: https://cornerstonesupport.com/licensing/
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How Do Debt Buyers or Debt Collectors Make Money?
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Debt buyers make money by purchasing accounts at fair market value considering factors such as the age of the debt, volume, and type of debt. They can then choose to collect the debt themselves, sell off portions of their portfolio, or pursue legal action against borrowers who refuse to repay.
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Key Considerations:
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- Age of the Debt: Older accounts are sold at a discounted rate due to diminished recovery anticipation.
- Volume/Size: Bulk purchases allow for negotiating discounts based on quantity.
- Type of Debt: Different types have varying recovery rates influencing purchasing power.
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Figuring Out Which Debt Collection Business Model Works for You
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Choosing between operating as a debt buyer or a third-party collections agency depends on your available investments, resources, and risk tolerance. Debt buyers require significant upfront costs to purchase bad debt, while collections agencies focus on recovering monies owed without investing in purchasing bad debt.
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Key Differences:
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- Debt Buyer: Involves purchasing delinquent debts at negotiated prices, requiring greater financial resources and higher risk levels.
- Third-Party Collections Agency: Provides services for recovering defaulted loans/accounts without investing in bad debt, usually less risky but with potentially smaller returns.
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Common Types of Debt Available to Buy in the Secondary Market
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- Credit Cards (consumer and retail)
- Short term installment loans
- Overdrafts (DDA)
- Bad Checks
- Mortgages
- Auto Loans
- Bail Bonds
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Setting Up the Business
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When starting a collection agency, it’s crucial to choose the right business entity based on your intended activities, expected income levels, and how you want to protect your personal assets. Options include forming a Limited Liability Company (LLC) or a corporation, each with its own tax and compliance implications. Consulting an attorney can help you make an informed decision.
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Debt Collection Software & Tools
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To streamline operations and ensure maximum efficiency, new collection agencies should invest in specialized software and tools, such as skip tracing software (e.g., Accurint, TLO, MicroBilt) and a collection-focused CRM system. These tools help with data accuracy, organization, compliance management, and scalability as your agency grows.
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Conclusion:
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The debt buying and collection industry offers significant profit potential but requires careful navigation of legal regulations, ethical practices, and strategic business planning. By understanding the nuances of debt buying, choosing the right business model, and utilizing the appropriate tools and resources, you can position your agency for success in this lucrative market.
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