Brokerage firms attempting to profit from buying bad debt have to consider the consequences as well as the possible benefits of the investment. Often, the more lucrative means of investing in older credit card charge offs is the way to go because a greater percentage can be collected. When a debt collection agency attempts to collect fresh debt, the circumstances surrounding the charge off are still a factor in the debtor's ability to pay, leading to reduced success in debt collection.
When a debtor allows a credit card to be charged off, it is typically because he or she is truly unable to make even a small payment to the credit agency. Due to unemployment, illness, or other extenuating circumstances, the issuer of the credit is unable to collect even a small percentage of the debt owed, sometimes not even collecting $0.15 on the dollar.
The question arises, then, how a debt collection agency buying bad debt can expect to do any better than the issuing creditor. In short, the likelihood of success is quite low.
In many cases, it is highly likely that the debtor will file bankruptcy during this early period. Therefore, buying bad debt that has been around for over a year can lead to a greater return on investment for the purchasing firm.
At this time, banks are likely to stop the pursuit of bad debt, having used enough resources attempting to collect on the money owed. Rather than use any more time and money, they will often be pleased to sell the portfolios for a minimal return, simply to rid their books of bad debt.
At this point, the brokerage firm buying bad debt can more easily pursue debtors for a higher sum, having given the debtor time to recover from whatever occurrence or issue caused them to default on their payments in the first place. After a year to 18 months, the debtor most likely has ironed out a number of issues, including finding employment or recovering from illness, and will be able to pay a greater portion of the debt owed.
In contrast, fresh charge offs are more difficult to turn into a profit. Banks are looking for a greater percentage in order to sell the bad debt portfolios, and debtors have fewer resources with which to repay their debt. Also, with the issuing creditor and possibly other agencies having been in pursuit of the debt for a greater amount of time makes the debtor more likely to want to end collection calls.
Though logic may state that a fresher debt is easier to pursue, the opposite is true. Buying older debt leads to greater profit margins for brokerage investors. The original creditor is more likely able to successfully collect on fresh charge offs, leaving older debt portfolios as a source of income for debt collectors.
When a debtor allows a credit card to be charged off, it is typically because he or she is truly unable to make even a small payment to the credit agency. Due to unemployment, illness, or other extenuating circumstances, the issuer of the credit is unable to collect even a small percentage of the debt owed, sometimes not even collecting $0.15 on the dollar.
The question arises, then, how a debt collection agency buying bad debt can expect to do any better than the issuing creditor. In short, the likelihood of success is quite low.
In many cases, it is highly likely that the debtor will file bankruptcy during this early period. Therefore, buying bad debt that has been around for over a year can lead to a greater return on investment for the purchasing firm.
At this time, banks are likely to stop the pursuit of bad debt, having used enough resources attempting to collect on the money owed. Rather than use any more time and money, they will often be pleased to sell the portfolios for a minimal return, simply to rid their books of bad debt.
At this point, the brokerage firm buying bad debt can more easily pursue debtors for a higher sum, having given the debtor time to recover from whatever occurrence or issue caused them to default on their payments in the first place. After a year to 18 months, the debtor most likely has ironed out a number of issues, including finding employment or recovering from illness, and will be able to pay a greater portion of the debt owed.
In contrast, fresh charge offs are more difficult to turn into a profit. Banks are looking for a greater percentage in order to sell the bad debt portfolios, and debtors have fewer resources with which to repay their debt. Also, with the issuing creditor and possibly other agencies having been in pursuit of the debt for a greater amount of time makes the debtor more likely to want to end collection calls.
Though logic may state that a fresher debt is easier to pursue, the opposite is true. Buying older debt leads to greater profit margins for brokerage investors. The original creditor is more likely able to successfully collect on fresh charge offs, leaving older debt portfolios as a source of income for debt collectors.
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