Also known as junk debt buyers, bad debt buyers are firms that purchase unpaid debts from different types of creditors at rates that are below the actual face value of the debts, then attempt to collect the full amount plus interest and penalties from the debtor. Bad debt buyers sometimes specialize on securing and collecting specific types of debt, including credit card debt, business debt, or loan debt.
Credit card bad debt buyers are one of the more common types of junk debt buyers. Here, the buyer purchases old credit card accounts with outstanding balances that the originator was unable to collect. Typically, the buyer offers the originator up to 50% of the face value of the debt, with the amount of the offer depending on the degree of risk associated with eventually collecting the total debt owed. In many cases, the purchase may be as low as 10% of the actual debt if the risk level is considered somewhat higher. The originator is then able to close the account and write off a partial loss. When successful, the buyer is able to collect not only the face amount, but also any penalties or interest that apply during the repayment period.
A similar approach is used when it comes to bad debt buyers who focus on taking over outstanding business debt. As with the unpaid credit card debt, the originator sells the delinquent account to buyer at a price that is less than the actual amount of the debt. The buyer in turn attempts to arrange repayment terms with the debtor, often making a significant profit in the interim.
Bad debt buyers sometimes specialize in purchasing outstanding loans that have fallen into default for one reason or another. This includes delinquent mortgages that may be currently held by investment companies. The debts may be sold in blocks that are sometimes identified as debt pool, with a discounted price negotiated for the collection of bad debts. Once the buyer has control of the debts, the process of debt collection begins, with the expectation that enough of the face value of those debts will be recovered to make the effort profitable.
It is important to note that bad debt buyers are different from debt collection agencies. When an agency is involved, the original owner of the debt still retains control and ultimately receives the funds recovered by the collection agency, less a percentage that is withheld by the agency for services rendered. In contrast, bad debt buyers purchase debt outright, becoming the new owners of that debt. When this is the case, the debtor no longer has the opportunity to work with the originator and must work directly with the bad debt buyer to settle the balance of the delinquent account.
