Debt purchase

default
Helene Mueller
eCollect support team

Debt purchase is often carried out after a specific period has passed and attempts to collect an outstanding amount haven’t been succesful. After this deadline, the default payment is considered as hard to recover and practically loses its original value. The default purchase procedure is usually implemented by specialised debt buyers, who offer a percentage of the debt amount to the original creditor and buy up his written-off debts. This percentage of the debt sum is considered as a profit and revenue for the lender. Once the creditor records the delinquent payments as uncollectible, every sold default account is marked as an income in lender’s system and represents a positive cash flow for his company. After the debt purchase, debt buyers either continue with the collection process by themselves or hire a DCA (debt collection agency) to continue with the recovery proceedings. When the debt is sold, the original creditor loses his right to claim any payment from the debtor. After the purchase of debt, the debt buyer becomes the new credit owner and is legally authorised to collect the default payment in full on the subject of debt.


Debt purchase executors

Different types of debt buying executors can carry out the whole default purchase process. Debt purchase parties are divided into these groups because debt buyers can either only purchase debts OR can represent a DCA and act as both debt purchaser and debt collection agent.

Debt buyers are the standard and most common debt purchasers. If they decide to collect a debt using their own trading name company, they will be known as a first-party, as they generally become the new debt creditor. In this case, they can decide not to hire a professional DCA and continue the collection process. According to the laws in some countries (the UK, for example), debt purchasers can collect the bad debts purchased but have no right whatsoever to apply a collection agency’s commission fee on top of the total debt amount. They cannot charge the debtor an interest as a DCA if they collect the default amount using the same trading name.

Debt buyers can also perform the whole debt purchase process as a third-party debt collection agency. If they decide to re-sell the debt to another debt buyer, but also offer professional debt recovery help to the new debt buyer, then the first debt buyers will play a role as a third-party debt purchaser AND a licensed debt collection agency.

Types of debt purchase

Depending on the types of debts bought, debt purchase can be split into diverse groups:

Unsecured debt purchase

Debt buying agents buy mostly unsecured debts, as creditors usually don’t need help from DCAs when it comes to secured debts, and don’t have the urge to sell the default profiles, as secured debt amounts are easy to recover. The reason is that a collateral always follows the secured debts, and in such way, the creditors are protected against issues with delayed payments.

Unsecured loans are generally connected with a lot of problems, which typically lead to unsecured bad debts. If a debtor falls behind with overdue payments, the creditor does not have any right whatsoever to collect debtor’s property without legal and court actions. Unsecured debts usually derive from unpaid medical bills, credit card debts (from the purchase of goods and services), car purchase loan, etc.

Individual and commercial default purchase

There can be debt purchase of individual and corporate default payments as well. In the first case debt, purchasers buy consumer debts. Individual debts derive from consumers’ delayed payments and commercial debts are the result of business loans for funding, equipment, training, etc. In the second case, the debtor and the creditor are both businesses, which is why such debts are also known as “business-to-business” (B2B) debts.

Debt purchase on local and international level

Such debt purchase consists of buying national or international debts. For the local debts, the debtor’s country of residence is the same as creditor’s; and for the international debts- that the debtor lives in a country different than lender’s base location. International debt buying is no different than the local one. The price of the debt does not depend on its location but on its age. The only difference between national and international debt buying proceedings is the collection process. In the first case the debt buyers (or the entity, who will continue with the recovery process) have to comply only with internal country laws, but if the debtor is based in another country, then the debt put


Used literature & external links

http://www.ftc.gov/reports/structure-practices-debt-buying-industry
 

http://www.wisegeek.com/what-are-the-best-tips-for-buying-bad-debt.htm
 

http://www.businessfunding.org/BadDebtComm.htm
 

http://www.ehow.com/about_6567999_debt-purchasing_.html
 

http://www.dri.org.uk/pdfs/EngPub4_DebtConv.pdf