Buying bad debt has become a new source of profit for many agencies, not just debt collection firms. Understanding the potential for profit, a large number of investors have sought to buy the rights to delinquent debt portfolios from companies such as banks, credit card agencies, and even health care providers, realizing there is money to be made when these accounts can be acquired for such a small cost.
How it Works
The individual or company buying bad debt bids a fraction of the actual total debt due to purchase the account. The creditor agrees to the sale, desperately in need of cash for their own business functions and no longer having the resources to pursue unpaid debt.
Most of the time, the purchaser can buy the bad debt for pennies on the dollar. Spending only a fraction of the actual potential for financial reward allows the investor an opportunity to reap the fruits of a small amount of labor.
By selling the bad debt, the creditor is relieved of the negative debt and the responsibility of collections, meanwhile recovering a portion of what was owed them. This means the debt purchaser is now the party charged with collection of unpaid debt, and there are two means by which an individual might decide to do so.
Build new portfolios from the purchased debt that can then be resold to collection agencies, drawing a profit on the sale. The agency will aim to collect in full from the debtor, which means they stand to profit over and above the fee for which they purchased the delinquent debt accounts from the investor. This practice is called passive debt buying.
Pursue the debtor to collect funds themselves. This requires more work, and often, the purchasing agent doesn't have the same incentives as the original creditor. However, if the agent decides to collect the delinquent debt through his or her own resources, the potential for profit could be phenomenal. This is known as active debt buying.
Why it Works
Everyone involved in the process of buying bad debt wins. The creditor is satisfied to have working capital rather than payment owed. The collection agency that may be involved gains new accounts that can mean more profit for their company.
Because the debt was purchased for a sum less than the total debt owed, the debtor can often settle for a smaller payment amount and clear their credit record. Most importantly, the debt purchaser reaps a profit from either the pursuit of delinquent debt or the sale of debt portfolios to a collection agency.
How it Works
The individual or company buying bad debt bids a fraction of the actual total debt due to purchase the account. The creditor agrees to the sale, desperately in need of cash for their own business functions and no longer having the resources to pursue unpaid debt.
Most of the time, the purchaser can buy the bad debt for pennies on the dollar. Spending only a fraction of the actual potential for financial reward allows the investor an opportunity to reap the fruits of a small amount of labor.
By selling the bad debt, the creditor is relieved of the negative debt and the responsibility of collections, meanwhile recovering a portion of what was owed them. This means the debt purchaser is now the party charged with collection of unpaid debt, and there are two means by which an individual might decide to do so.
Build new portfolios from the purchased debt that can then be resold to collection agencies, drawing a profit on the sale. The agency will aim to collect in full from the debtor, which means they stand to profit over and above the fee for which they purchased the delinquent debt accounts from the investor. This practice is called passive debt buying.
Pursue the debtor to collect funds themselves. This requires more work, and often, the purchasing agent doesn't have the same incentives as the original creditor. However, if the agent decides to collect the delinquent debt through his or her own resources, the potential for profit could be phenomenal. This is known as active debt buying.
Why it Works
Everyone involved in the process of buying bad debt wins. The creditor is satisfied to have working capital rather than payment owed. The collection agency that may be involved gains new accounts that can mean more profit for their company.
Because the debt was purchased for a sum less than the total debt owed, the debtor can often settle for a smaller payment amount and clear their credit record. Most importantly, the debt purchaser reaps a profit from either the pursuit of delinquent debt or the sale of debt portfolios to a collection agency.
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