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Debt Buyers – The Lowdown

Today we’re going to take a look at the practice of debt buying – a debt buyer is a company (sometimes a debt collection agency or private debt collection law firm) that buys delinquent or charged off debts from a creditor for a fraction of the face value of the debt. The debt buyer can then choose whether to collect the debt itself, use the services of another collection agency to recover the debt, repackage and resell portions of the portfolio or any combination of the previous options.

Because it’s such a profitable practice, the debt buying industry has rapidly expanded in recent years, especially since 2000.  Credit card debt makes up about 70% of the accounts sold to debt buyers, followed closely by car purchase loans, telecommunications debt and retail debts.  However, purchased debts will also sometimes include personal loans, utilities bills and secondary mortgages.  

Debt buyers range in size from small private businesses to large companies that are publicly traded.  Depending on the age of the debt and its history, a buyer will usually pa between 3% and 16% of the face value of the debt, with accounts that come directly from the original creditor without having been placed with a collection agency being the most popular purchase and enjoying the highest value.  Debt buyers who attempt to collect on the accounts that they buy are classed as active, while those who invest in the debt and then outsource the collection process to a collection agency or law firm as classed as passive.

The practice of debt buying hit the headlines back in November of 2013 when Occupy Wall Street activists paid $400,000 for hundreds of American medical debts which were worth a whopping $15 million and then cancelled the debts as an act of charity.  Each of the original debtors received a letter identifying the debt and telling them that they are no longer under any obligation to settle the account with the original creditor, a welcome relief to some of American’s poorest and most vulnerable citizens.  The Occupy Wall Street movement achieved this through its Rolling Jubilee project, a non-profit initiative which buys personal debts for pennies on the dollar in the secondary market and then cancels the debts.

Here in the UK the debt buying industry is a profitable business, worth around £800 million a year and it’s usually the big players who buy these debts from the banks in job lots.  In Britain debt buyers already own more than £50 billion of unsecured defaulted debt, which is far more than the banks, and work with the debt advice sector to get the best deal for consumers.

The Credit Services Association (CSA) is the trade association for the debt collection and debt purchase sector and it is their role to make sure that debt buyers work to the highest possible industry standards, sharing not only best practice with creditors, but going above and beyond that in order to ensure that they act as a creditor would to offer a consistent experience for customers.