A debt buyer functions by purchasing debt from an issuing creditor. This issuing creditor loaned money to a consumer who failed to make payments until the debt became delinquent. Once the issuing creditor determines that a debt is unlikely to be collected, they may choose to sell it to a debt buyer for a fraction of the debt amount. This benefits both the issuing creditor, who will recover at least a small amount of money, and the debt buyer, who can now profit from the debt if they can collect any money from the consumer.
Typically, debt buyers pay between $0.01 and $0.20 per dollar of debt. If a debt account is sold for $0.20 per dollar of debt and the debt balance is $500, for example, then the debt buyer would pay $100 for that account. Delinquent accounts are typically sold together in large groups called portfolios. Once a debt buyer purchases debt, they own the debt and keep any money they manage to collect.
The debt buying practice has slowed in recent years, and debt buying that still occurs is mostly consolidated among a handful of established debt buyers. Since the COVID-19 pandemic began and the US government issued relief measures (including the Coronavirus Aid, Relief, and Economic Security (CARES) Act), consumers have improved delinquency rates for personal loans, mortgages, and student loans since 2019. The CARES Act suspended student loan repayment and issued guidance for mortgage lenders, allowing many borrowers to place their home loans in forbearance. Forbearance is an agreement between the lender and borrower to delay foreclosure. This helps explain the improvements in student loan and mortgage delinquencies.
Debt buyers purchase many types of debt, including medical bills, mortgages, car loans, utilities, and more, but the majority is credit card debt.
A mortgage is considered underwater when the value of the home is less than the original mortgage principal, which can occur when property values fall. Once a mortgage is underwater, it can fall into foreclosure. Because a mortgage is a secured loan, the lender can attempt to recover their money by forcing the sale of the collateral, which is the home. While many home loans are currently in forbearance during the COVID-19 pandemic, those opportunities will eventually come to an end. When this happens, unemployment could continue, causing foreclosures and debt buying to increase again.
Similarly, when a car loan cannot be paid - due to unemployment or any other reason - it can be repossessed by the lender since the loan is secured.The vehicle will most likely then be auctioned to recoup some of the money. If the auction price is less than the loan balance, the leftover amount is referred to as the deficiency balance. This balance can be sold to debt buyers.
Personal loans and credit card debt are also commonly purchased by debt buyers.
Debt buyers are known for their history of hassling consumers, and they are still likely to be aggressive. If you are contacted by a debt buyer, you may be subject to numerous phone calls and letters while your debt remains outstanding. There are laws in place, however, to keep debt buyers from acting unreasonably and dishonestly. The Fair Debt Collection Practices Act (FDCPA) prevents certain unethical tactics, including pretending to work for the government, threatening to have you arrested, publicly shaming you, calling you outside the hours of 8 AM to 9 PM without your permission, and more.
Working with a debt buyer, however, can provide an opportunity to resolve your debt in a way that is beneficial for you. Particularly if your credit score is already poor and you’re not worried about it worsening, you can try to avoid paying the debt in full and save money by negotiating instead. Since debt buyers pay far less than the debt balance to acquire the delinquent account, they are more likely than the issuing creditor to work with you—often offering longer repayment terms or a lesser, lump sum amount.
Another benefit to working with a debt buyer towards repayment is that you can avoid being sued. Most debt buyers will eventually turn to the courts if they cannot recover any money, so it could be in your best interest to negotiate a more beneficial outcome, pay off the delinquent debt with better terms, and then work to improve your credit afterwards.
Need assistance connecting with a debt buyer? Kredit can help.