What is a debt buyer?

Generally, a debt buyer purchases debts that are considered to be uncollectable by the original creditors (the lender or bank that originally loaned the money).  These debts include, but aren’t limited to, credit card debts, loans, and auto repossession deficiencies.  Many large banks including Chase, Citibank, Capital One, Bank of America, Credit One Bank bundle up these defaulted debts into “portfolios” and sell them to debt buyers. Major debt buyers include Portfolio Recovery Associates, Midland Funding, LVNV Funding, Unifund CCR, and Cavalry SPV. Not all lenders sell their debts to debt buyers. Sometimes, they will continue to attempt to collect the debt by hiring debt collectors to do the collection work. Typically, debt buyers, not collection agencies, file lawsuits on these debts and use legal means to collect the debts.

Debt buyers buy debts for pennies on the dollar but try to collect the entire debt

Debt buyers don’t purchase these debts dollar for dollar. This would put them in a risky position to lose money just like the bank. Instead, debt buyers pay the lenders pennies on the dollar for the debt.  A Federal Trade Commission Study released in 2013 concluded that during its study, the average cost paid to lenders by some of the biggest debt buyers in the industry was $0.04 on the dollar.  That means, if the debt you owed to the original creditor (Chase, Citibank, etc.) was $1,000, a debt buyer may have purchased that debt for a $40.  The debt buyer will then turn around and try to collect the entire $1,000 from you.  If they are successful in collecting the entire amount of the debt from you, then that is quite a return on their investment.  The price a debt buyer may pay for a debt portfolio changes just as the economy does.  Additionally, the price paid for older debt is much less than the price paid for “fresh” debt that was recently “charged off” by the bank.  Big debt buying companies use sophisticated analytic strategies to collect on portfolios of debt and make tons of money collecting those debts that the original creditor considered uncollectable.

Debt buyers often have skimpy documents to prove the debt

There are often numerous contestable issues with the documentation used by debt buyers in court to demonstrate that they are the lawful owners of the debt in question and the debt in question can be properly proven. Debt buyers often receive limited information and documents about an account when purchased from the original lender. The information typically sent to the debt buyer upon purchase is in spreadsheet form. This spreadsheet usually includes name, date of birth, address, account open date, last payment date, last balance, last payment date, and other related information. The purchase agreement between the debt buyer and the original lender may limit the information and documents the debt buyer may later get from the original lender about a particular account after the sale. Typically, the original creditor sells the portfolio of debts “as is” and does not guarantee that the information provided to the debt buyer is accurate.

Sometimes debt buyers sell debts to other debt buyers

It is not uncommon for debt buyers to resell the debt to another debt buyer. The documents that “link” the original creditor to a debt buyer who purchased the debt is often referred to as “chain of title.” When the debt is subsequently sold from a debt buyer to another debt buyer, this creates additional links in the chain of title. The debt buyer claiming to own the debt must prove ownership of the debt throughout the entire chain from the original creditor to the present alleged owner. The further down the chain the debt goes, the more difficult and costly it can be to obtain additional documents or information about the debt. Further, we already know that the original creditor doesn’t warrant that the accuracy of information and documents sold to debt buyers, so each subsequent link in the chain of title represents a continuation of that possibility of inaccuracy.

Debt buyers win the majority of their cases by default

When a debt buyer files a lawsuit against a consumer, you might be thinking it would be difficult for the debt buyer to win its lawsuit if it has only limited information, limited documents, and no guarantees of accuracy from the original creditor. However, the majority of the time, the debt buyer is not challenged on whether its evidence is sufficient to prove its case. Instead, the debt buyer wins the majority of the lawsuits by default because the defendant does not contest the lawsuit. This usually means that the defendant did not file an answer with the court or did not come to a scheduled court date. If no one is there to contest the debt buyer’s claim, a default judgment against the defendant usually results. Some jurisdictions have established guidelines creating mandatory minimum document requirements that a debt buyer must present to the court in order for the judge to sign off on a default judgment. However, there are typically numerous contestable issues even with those documents.

Know your rights when dealing with debt buyers and debt collectors

A federal law called the Fair Debt Collection Practices Act (FDCPA), enacted to protect consumers against misleading and abusive debt collection actions, applies to most debt buyers who have obtained defaulted debts from original lenders and debt collectors hired by the original lenders to collect debts. The FDCPA does not apply to the original lender in its own attempts to collect the debt.