Buying and selling of debts in the United States
Every year in the United States thousands of people file for bankruptcy because they cannot pay their medical, travel or miscellaneous debts, here we will talk about some solutions and how people should address them.
The debt buying industry in the United States has seen a dramatic expansion in recent years.
Of course there are many legitimate debt collection companies that, following legal processes, demand payment of obligations owed to companies that would go bankrupt if they did not pursue debtors.
But when companies that specialize in debt collection become owners of that debt, they are more inclined to target higher returns and employ unethical practices.
There are debt collection regulations established by consumer protection agencies. For example, they prohibit deceptive practices such as threatening the debtor with arrest. But many intimidation tactics have been reported.
Sell a debt: Meaning and Concepts
Oliver showed attendees at a debt collectors’ conference on his show, and some industry professionals joked about “bullying” their victims and ruining their lives. The presenter stated that the purchase of a debt tends to be a shady business.
But regulation is insufficient. In more than half the states in the country, debt can be purchased legally without a license to do so. And in 17 states, no license is needed to collect them.
There is also very little documentation associated with these debt collection operations, which is a problem when some cases go to court, according to a report by the human rights organization Human Rights Watch.
When institutions sell lists of debtors, they do not guarantee that the information is correct.
Let’s get into a little bit of what the basics are about debt buying and selling in the United States.
If you’re like most consumers, you’ve probably never heard of debt buyers, but you may have dealt with one if you’ve ever had a debt in collection.
Debt buying has become a big industry in the United States, where companies buy portfolios of unpaid debts from creditors for pennies on the dollar.
They then start calling you to pay more to make a profit on the debt they have purchased, selling your debt to a buyer has advantages and disadvantages.
What is a debt buyer?
A debt buyer is a company that acquires outstanding debts for just a few cents on the dollar. They are also known as “junk debt buyers” or junk debt buyers (JDBs).
When you default on a debt, the creditor writes off your account, which means you appear as a loss to them.
For a time, they may attempt to collect the debt from you, either through their internal collection department or through a collection agency that attempts to collect on your behalf.
Ultimately, however, they may decide to sell your account in a written-off debt portfolio to another company. When they do so, the company pays them for their bad debt, which means they recoup part of their losses.
The cost of buying back your debt typically ranges from $0.04 to $0.14 on the dollar. Therefore, if you have $10,000 in debt and the debt buyer purchases it for ten cents on the dollar, you 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 to your creditor. Any money you collect above the $1,000 purchase price is the profit you make on this high-risk investment.
A debt buyer can then attempt to collect the debt, contact a third party to attempt to collect on your behalf, or sell the debt back as part of another portfolio. As a result, your overdue debt may be bought and sold multiple times.
How does debt buying work?
Of course, debt buyers don’t buy one debt at a time. They buy large portfolios of delinquent debt from credit card issuers.
Of the six major U.S. credit card issuers, five of them use debt buying as a means of recovering money for unpaid debts.
While they may receive less than five percent of the total amount owed, they at least reduce their losses.
Debt collection is a $12 billion industry in the U.S., and credit card debt accounts for 70% of the debt acquired by debt buyers, so it is very likely that if your credit card debt is written off, it can be sold to a debt buyer.
Debt buyers take on a lot of risk when acquiring these portfolios.
They are usually a mix of different levels of delinquencies. It’s a bit like buying a storage unit at auction or a selection of merchandise on eBay.
You may end up with one or two cards that are actually worth something, but the rest are mostly worthless.
Debt buyers take on risk with the assumption that they can earn a return on their investment with respect to at least some of the debt included in the portfolio.
In some cases, they may simply resell the portfolio to another debt buyer or split it into smaller strips for debt buyers with less capital.
What does it mean to sell debt?
As a consumer, you may not think there is much difference between dealing with a debt collector working on behalf of a creditor and dealing with a debt buyer. However, there are some differences. Some play to your advantage and some do not.
When an account is sold to a third party, a collection account is created on your credit report. The original account balance will be updated to zero because you no longer owe anything to the original creditor.
The new collection account will remain there for seven years from the time the original account became delinquent.
This is not good for your credit. Collection accounts will make you look like a higher risk borrower to creditors reviewing your credit report.
The account will also negatively affect your credit score. As a result, you may pay higher interest rates or even be turned down for loans and credit card applications.
Debt buyers get your debts fot just a few cents on the dollar. That means you can usually negotiate a lower percentage to pay off the debt.
A creditor or collection agency working on your behalf will want to get as much money as possible, since anything not paid in full is a loss to them. On the other hand, a debt buyer can settle for 20% or 30% of what you owe and still make a profit.
Therefore, if you know you are negotiating with a debt buyer, start at the bottom of the negotiations. A lowball offer may work.
How to sell debt effectively?
They decide to sell debt because unpaid companies can recover part of their liquidity, even though they often only manage to recover about 4% of the total.
But, it is profitable because the lenders avoid their expenses to manage the files of their debtors. Likewise, they avoid the heavy work of follow-up and legal advice to try to collect the debts.
The debts are bought because the legal experts in collections know the details to recover their investment with juicy benefits, since when they buy debts they obtain important disbursements, collecting what the defaulters owe.
Ideal conditions to sell a debt
The defaulters are confident that by selling debt this is exhausted, given its expiration date according to the law, but when a debt collection company buys a debt is because it has methods to exercise their collection, they are sure to make a profit, so they appeal to the judicial means and also, each type of debt varies in conditions and expiration.
Putting a debt up for sale
Many times the collection companies do not go to court, but send the communication to the debtor notifying the company’s claim. It should be noted that the expiration of a debt is not interrupted, but the statute of limitations can be interrupted and modifies the conditions of any claim.
The maximum period for the expiration of a debt is five years in the case of regular payments, starting from the due date of the financial obligation of payment of a monetary or credit debt.
Companies resolve to sell debt of their clients within the legal framework, since bank and credit financing contracts usually include agreements between the entities and their clientele that allow creditors to sell debt, without prior authorization from the debtor.
Debtors cannot refuse to pay a collection company that has purchased their debt, since the assignment of the receivables simply changes the ownership of the receivables and the obligation to pay continues with the new creditor.
Debtors continue with the duties and guarantees they acquired with the debt, according to the Civil Code in force.
When the outstanding debt is given in credit assignment to a debt collection company, it is important that they check that the data have been obtained legitimately, so that it is a legal collection and has a stable legal relationship between the company and the client.
In this case, the collection agency uses the debtor’s data and verifies that when selling debts they are monetary, liquid, overdue and really due in a legal process.
Also, they make sure that the debtor has been informed of the possibility of being included in the debt collection file and that the debt actually requires payment.
Another fact verified by debt collection agencies is that the debt has not been claimed judicially or administratively by the debtor or through an alternative dispute resolution process by binding consumer arbitration and that the amount of the debt is greater than 50 dollars
However, problems and irregularities arise when the agencies that purchase debts commit illegal practices such as coercion or use deceptive collection strategies, assuming violent tones when collecting.
Likewise, it is very common for these collection companies to address debtors in derogatory terms, hide information or assume derogatory or threatening attitudes that are out of touch with reality.
These are intimidating practices to exercise legal proceedings against debtors.
These are threatening practices that can be denounced and that have had precedent condemnatory sentences, such as the condemnation of an employee and a debt collection company as a subsidiary civil liability, since they used intimidating practices against a defaulter.
What are zombie debts?
A zombie debt, as the name implies, is an old debt that has long since left your memory and possibly your credit reports. These old debts are usually bought by collection companies for pennies.
The collection companies then turn around and try to collect the entire debt from the consumer. Many times, the collection companies do not have the legal rights to collect the debt.
They count on the consumer to make a wrong move to bring the zombie debt back to life (and legal rights).
The most common types of zombie debt are credit card debt or medical bills. It may be a debt that you do owe, debts that you have previously settled with the original creditor, or even debts that are not yours at all.
Usually, the debt is so old that Florida law does not allow the debt collector to sue you.
Is selling debts in the United States legal?
Selling debts from one creditor to another can be done without seeking your permission, but with your knowledge. According to the law, the consumer must be notified in writing, this document is known as a “debt validation” within five days of the collector’s initial attempt to contact you.
The largest debt buyer in the U.S
Within the United States there are about 1,000 debt collectors and debt buyers.
Encore Capital Group, in San Diego, California, and its affiliates make up the largest debt buyer and debt collector in the country.
Encore, as a debt buyer, purchases past-due debt at a discount from the face value of the debt.
Despite paying a lower amount for the loan, they are able to collect the full amount requested by the original lender. They obtain the right to reclaim overdue debts, such as credit cards, phone bills, among others.