Buying Bad Debt – What Is It?

here is always money to be made in both good and bad economies, especially when there are companies and individuals who incur debt and firms that are willing to make a profit by buying bad debt. Buying bad debt is a billion dollar business and, with literally millions of American companies and families racking up consumer credit card, commercial loan defaults and delinquent student loan debt, there are financial opportunities to be had. Of course, firms that purchase bad credit are never simply looking for an equal return on the original face amount of the debt, but want to collect on high interest or debt penalties that have accrued. The original holder of the debt will profit from clearing their financial books of the bad debt as well as collect at least a minimum amount of 10 to 50 percent of what was owed on the bad debt.

What is it?

As a general rule, when someone or some company has defaulted on a loan, credit card, or other type of financial instrument, the institution owed the money is left holding the financial bag. The millions of credit card holders who cannot stretch card payments out any further make up the largest category of bad debt holders and are the primary target of bad debt buyers. The process involved in collecting from these defaulted debts is termed “buying bad debt”.

It Can Be Lucrative

Buying bad debt can be lucrative, depending upon the age of the debt and if the total debt incurred as well as penalties and interest can be secured. In addition, there are other forms of bad debt that can be bought from credit holders, including department stores that wish to jettison their bad credit accounts and not further encumber staff or legal efforts to recover debt. Student loans, automobile loans and even bail bonds companies that have been left holding the tab, are good targets for firms interested in buying bad debt.

Precautions to Take

Even firms that purchase bad debt must take precautions to make certain they do not encounter legal or financial statutory prohibitions in attempting to collect on the debts that they now own. When buying bad debts, the federal or state statutes that govern prohibitions on abusive and aggressive collection tactics used to collect on debt are still applicable. For example, when collecting on a debt, all of the documentation associated with the bad debt must be accurate and when presented either to the individual or in a legal process, should never be fabricated or inaccurate.

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