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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.
What is a Debt Buyer and How Does Debt Buying Work?
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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 buyers purchase distressed consumer loans at deep discounts, while debt collection agencies take over collection efforts without buying the outstanding balances.
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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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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.
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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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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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Age of the Debt: Older accounts are sold at a discounted rate due to diminished recovery anticipation.
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Volume/Size: Bulk purchases allow for negotiating discounts based on quantity.
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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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Debt Buyer: Involves purchasing delinquent debts at negotiated prices, requiring greater financial resources and higher risk levels.
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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)
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Short term installment loans
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Overdrafts (DDA)
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Bad Checks
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Mortgages
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Auto Loans
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Bail Bonds
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Setting Up the Business
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Debt Collection Software & Tools
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Conclusion:
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