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Debt buyers are quietly trading America's past-due debt

What is a Debt Buyer? » Debt Collection » What is a Debt Buyer?



If you’re like most Americans, you’ve probably never heard of a debt buyer, but you may have dealt with one if you’ve ever had debt in collections. Debt buying has become a big industry in the U.S., where companies buy portfolios of charged-off debt from creditors for pennies on the dollar. Then they start calling you to get you to pay more, so they can make a profit off the debt they purchased.

There are upsides and downsides to having your debt sold to a debt buyer. Read on to learn everything you need to know about how to deal with a debt buyer.

What is a debt buyer?

A debt buyer is a company that buys delinquent debts for pennies on the dollar. They’re also known as “junk debt buyers” or JDBs for short.

When you fail to pay a debt, the creditor charges-off your account, meaning that it’s listed as a loss for them. For a time, they may try to collect the debt from you, either through their in-house collections department or through a collection agency that attempts to collect on their behalf. Eventually, though, they may decide to sell your account in a portfolio of charged-off debt to another company. When they do, they get paid by the company for your bad debt, which means they recoup some of their losses

The cost to purchase your debt is usually between $0.04 and $0.14 for every dollar. So, if you have $10,000 in debt and the debt buyer purchases it for ten cents on the dollar, they may pay $1,000 to buy your debt. You still owe the $10,000, but you would pay this money to the debt buyer instead of your creditor.  Whatever money they collect beyond the $1,000 purchase price is their return on this high-risk investment.

A debt buyer can then attempt to collect on the debt, contact a third party to attempt collection on their behalf or sell off the debt again as part of another portfolio. As a result, your past-due debt can be bought and sold multiple times.

How debt buying works

Of course, debt buyers do not buy one debt at a time. They buy large portfolios of delinquent debts from credit card issuers. Of the six main credit card issuers in the U.S., five of them use debt buying as a means to recoup money on unpaid debts. While they may receive less than five percent of the total amount owed, they at least cut their losses.

Debt collection is a $12 billion industry in the U.S.[1] and credit card debt accounts for 70 percent of the debt purchased by debt buyers.[2] So, chances are good that if your credit card debt is charged off, it could be sold to a debt buyer.

Debt buyers are taking a big risk when they purchase these portfolios or “strips”. Usually, they are a mixed bag of different levels of delinquent accounts. It’s a bit like buying a storage unit at an auction or a selection of merchandise off eBay. You may end up with one or two cards really worth something, but the rest are largely just junk.

Debt buyers are taking the risk with the assumption they can get a return on their investment with regard to at least some of the debts included in the strip. In some cases, they may simply resell the strip to another debt buyer or divvy it up into smaller strips for debt buyers with less capital.

What it means for you if your debt gets sold

As a consumer, you may not think there’s much difference between dealing with a collector working on behalf of a creditor and dealing with a debt buyer. However, there are some differences. Some work in your favor and some don’t.

The downside

When an account gets sold to a third party, it creates a collection account on your credit report. The balance on the original account will be updated to $0 because you no longer owe the original creditor. The new collection account will be there to stay for seven years from the time the original account first became delinquent.

This is not good for your credit. Collection accounts will make you look like a higher risk borrower to creditors who review your credit report. The account will also negatively impact your credit score. As a result, you may pay higher interest rates or even lead to rejections on loan and credit card applications.

Be aware that even if you pay off a collection account in full, it usually won’t remove the collection account. You can try to negotiate for pay for delete, where the collector agrees to remove the account in exchange for payment. However, the results of these types of negotiations are not guaranteed. By and large, you will be stuck with a collection account on your report for seven years from the time the original account became delinquent.

The upside

Debt buyers purchase your debt for pennies on the dollar. That means you can usually negotiate a lower percentage to settle the debt. A creditor or a collection agency working on their behalf will want to get as much money as possible because anything less than paid-in-full is a loss for them. On the other hand, a debt buyer can settle for 20 or 30 percent of what you owe and still make a profit.

So, if you know you’re negotiating with a debt buyer, start lower in the negotiations. A low-ball offer may work.

What’s more, you may not need to pay anything at all. The debt buyer must have complete information when you ask them to validate the debt. The must be able to provide the name and address of the original creditor that you owe,  the date the account became delinquent, and even proof that they purchased the debt. If they don’t have complete information, then they can’t legally take you to court or even report the collection account to the credit bureaus.

Always require a collector to validate the debt fully. If they can’t, then you may be off the hook. Simply send a cease and desist letter and they’re required by law to leave you alone.

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How debt buyers breed zombie debt

Have you ever had a collection account that you thought you’d dealt with, but it just keeps coming back to try and bite you? You settle with one collector and then another collector calls you? Or you send a cease and desist to one, only to have another call you about the exact same debt?

This is known as zombie debt. No matter how many times you think you kill it, it just keeps coming back.

Well, in most cases this is an annoying byproduct of debt buying. You may deal with one debt buyer, only to have them sell your account to another buyer in a strip. This can happen even if:

  • you sent a cease and desist
  • you proved the collector didn’t have complete information to validate the debt
  • the debt is past the statute of limitations
  • you paid a settlement

If a new debt buyer contacts you about an account you’ve already taken care of, then you just need to go through the debt validation process again. The new collector won’t have complete information either if the previous one didn’t. If you paid a settlement, a signed copy of your agreement to settle should kill the zombie debt. Send another cease and desist and it should put the zombie back in the ground.


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