To sell debt means to start a debt sale procedure. Such procedures are usually carried out by a business and sold to a third party (usually a debt collection agency; in this case, also known as a “debt buyer”), for collection at a certain price, which is a fragment of the original debt’s amount (ext. link 1). A debt can be sold as a one-off deal or on a continual basis. In the second case the creditor agrees to sell certain delinquent accounts to the debt buyer at an agreed price, prior to the deal; and also for a period of time, which is specified before the beginning of the sell debt process. The value of the default payments, which are to be sold, is determined by the quality of the debt (depending on how old it is).
Selling debt: benefits
The selling of debt is beneficial for the three parties: the original creditor, the subject of debt, and the debt purchaser. No matter if the debt is sold or not, the subject in debt still has an overdue amount to be settled, BUT from the debt selling process he will either obtain a better arrangement or feel no difference in the amount to be paid.
Selling bad debts can be beneficial for the original creditor in the following aspects:
- Increase of cash flow and clearance of capital problems- When a creditor places his default payments with a non-recourse debt purchaser, he gains an immediate benefit, also known as “immediate cash on hand”; Optimisation of revenue;
- Elimination of future expenditures connected with already existing defaulted profiles;
- Reduce of administrative issues by selling the problematic accounts;
- Drastically increase of liquidation rate on bad debts;
- When selling a debt, the creditor will receive useful information about his company’s weak points, if any (e.g. accounts receivable, data management, audit subdivision, etc.) Dropping collection risk percentage by selling defaulted accounts- some debts, which are unlikely to be paid, are marked as “uncollectible” or “hard to collect”. Therefore, selling such accounts will benefit the company more that not selling them;
- After selling the debt to a third party, the original creditor can concentrate on new deals and other important sectors of his business;
- The debt purchaser might agree to provide the debtor with more time to pay off the amount due, because default payment accounts purchased by a debt buyer, are less connected with debt buyer’s cash flow. This can be beneficial for the subject of debt as well;
- As the process of sell debt may have negative features as well, the creditor might not want to sell his debts, even if he has issues collecting them. If he decides not to sell his delinquent account but he needs help with collecting them, the same can always seek the professional services of a debt collection agency.
Types of debts for a “sell debt” process
Depending on the age of debts, debt buyers can purchase the following default profile payments:
New debts, which are up to 6 months old, where the original creditor has not made any attempts to collect them; Primary debts (up to 12 months)- there have been some attempts to recover the amount due; Old debts (up to 30 months and older)- a lot of attempts have been made in order to collect the original debt amount; sometimes such debts are marked as “uncollectible”; Debt purchasers usually buy the following types of bad debts:
- Overdue amounts from purchasing goods and services;
- Lease debts. A “lease” refers to a legal agreement, which grants a second party (consumer/tenant) the right to legally occupy or inhabit a property of an owner. The owner is a first party (landlord/creditor/lender) and he can lend his property to the second party for a fixed period of time in exchange for a rent paid by the consumer;
- Judgment default payments- an amount, determined by court, due to be paid from the debtor to the creditor;
- Debts, derived from unsecured loans;
- Debts of trade, also known as “trading debts” or “trade debts”. Those are the payments, which the consumer is allowed to settle after the date of purchase (but always referring to a specific period of time granted for payment); and others.
Unmarketable or unsalable debt profiles
Sometimes, for different reasons, it may occur that some defaulted accounts are not saleable, such as when the debtor:
- Is deceased. Here, however, it may vary depending on the country laws. In Germany, for example, under specific circumstances, heirs might have to pay the debts of their deceased relative;
- Entered into formal insolvency procedure, strictly speaking- when the subject of debt stated insolvency legislation. In other words- when the subject of debt is unable to pay his debts and liabilities;
- When the debtor has declared bankruptcy. This is the last process of insolvency. A debtor is declared to be bankrupted either by court at the request of a creditor or on the base of his own inquiry, etc.;
Went into liquidation (referring to cases when the debtor is a company/business).
Used literature & external links