March 17, 2011
Buying Bad Debt: Key Facts Pertaining To Buyers
When a brokerage firm or debt collection agency decides to acquire a portfolio of bad debt from a bank or other credit agency, it must determine the most lucrative investment options available. In many cases, buying bad debt can be more profitable if the debt is older because a greater percentage can be collected. Fresh debt is harder to collect because of the circumstances that led to a debtor not fulfilling the obligation to pay in the first place.
A charge off is typically caused by a circumstance that reduces or removes the debtor’s ability to pay even a portion of the debt owed the creditor. Lack of employment, sickness, and other difficulties lead to the issuing creditor’s inability to recover even a fraction of the bad debt, even though many banks are willing to seek as little as $0.15 on the dollar of the debt owed.
If the issuing creditor, who is close to the fresh debt, cannot collect these funds, how can a debt collector expect to do so? The answer is simple – the debtor won’t pay it.
When the charge offs are fresh, there is a greater chance that the debtor will file for bankruptcy, therefore not paying any of the debt owed. However, if the debt is over a year old, buying bad debt can lead to greater return on investment for the debt collection agency.
At this point, the original creditor has likely reduced or completely stopped pursuit of bad debt, conserving their resources. Instead, a purchasing firm has a greater opportunity to purchase bad debt portfolios for a smaller percentage of the total debt, with the banks and creditors pleased to simply remove the bad debt from their finances.
Also, because in 12-18 months after the charge off, a debtor has likely resolved whatever circumstances led to the charge off in the first place, a brokerage firm or debt collection agency buying bad debt will often be able to recover a larger sum. Typically, the debtor will have recovered from illness or found employment, making payment a more viable option for them.
On the other hand, a newer charge off is harder to profit from. Early on, banks will demand a greater percentage as payment for the purchase of bad debt portfolios, and pursuing debtors will result in less funds recovered. A brokerage firm can also succeed based on previous attempts at collection, with the debtor growing tired of receiving collection calls from the issuing creditor or perhaps other collection agencies.
Logically speaking, it seems that newer, fresher debt would be easier to pursue and turn a larger profit. However, the issuing creditor may be able to achieve good results, but a brokerage firm buying bad debt will turn a greater profit by investing in older charge offs and debt portfolios.
Next, explore more important facts and resources about buying bad debt services, as well as collection agencies solutions.
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