Debt Buyer: Who They Are and How They Work

What Is a Debt Buyer?

A debt buyer is a company that purchases debt from creditors at a significant discount.

Debt buyers, such as collection agencies or a private debt collector, buy delinquent or charged-off debt at a fraction of the debt's face value. The debt buyer then aggressively tries to collect on the debt either on its own or through the hiring or a collection agency or resells portions of the debt, or any combination of these alternatives.

Key Takeaways

  • A debt buyer is a type of debt collector who purchases a creditor's debt at a discount in order to collect on it.
  • Creditors sometimes prefer selling their debts at a loss to debt buyers as a tax write-off.
  • Meanwhile, the debt buyer can collect on 100% of monies owed without having to pay back anything to the original creditor.
  • Even if a debt buyer does not collect the full debt, it can still earn a profit by collecting a portion of it.

How Debt Buyers Work

Debt buyers generally pay a very low percentage of the face value of the debt—sometimes just cents on the dollar. Debt buyers exist as small, private businesses or large publicly-traded companies. They are classified as active if they try to collect on the debt themselves, or passive if they hire an outside collection agency or collection law firm to recover the debt. The debt buyer business is a multi-billion dollar industry.

Debt buyers primarily purchase delinquent debt arising from credit cards, automobile loans, medical bills, mortgages, retail accounts, and utilities.

Why Debt Buyers Are Used

If a lender, such as a mortgage company or financial institution is unable to collect payment on outstanding debt according to the terms of their financing, they may seek to recoup some of the loss. There are instances in which a lender sees limited or no opportunity to recover the funds within the time frame originally outlined when the loan or credit was taken out.

Rather than continue to wait for the debtor to pay off the delinquent debt in full, the lender could turn to a debt buyer and transfer ownership of that account for a smaller return. Such an option might be taken as an alternative to the debt lapsing into a complete loss for the original lender.

The debt buyer, after taking ownership of the delinquent accounts, may then pursue a variety of strategies to reclaim some value.

Strategies a debt buyer can use include structuring a new set of terms for repayment with the debtor or applying new tactics through a collection agency to compel repayment.

The overall approach of the debt buyer is to leverage the value of the outstanding, delinquent debt to see a return on their investment. The debt buyer may have more flexibility than the original lender in terms of how they go about recovering funds from the debtor.

Furthermore, because the debtor buyer acquired the debt at discounts that may be as low as pennies on the dollar, even small repayments on the accounts can translate into profit for the company.

How do Debt Buyers Make Money?

Debt buyers make money when they collect interest on the debt that they purchase. A debt buyer can make money even if it only collects some of the interest owed on the debt, which they typically purchase cheaply.

Are Debt Buyers Considered Debt Collectors?

Debt buyers that purchase debt and then collect payments owed are also called debt collectors. debt collection companies, or debt collection agencies.

What Happens if You Don't Pay Collections?

If you don't pay a debt collections agency, the agency can notify credit bureaus about your failure to pay and your credit score will suffer. They may also file a lawsuit against you.

The Bottom Line

Debt buyers purchase delinquent debt from creditor like credit card companies, utilities companies, and banks to collect payments from borrowers with interest. If you have unpaid debt that has been purchased by a debt buyer, it is important to try to pay what you owe to avoid damage to your credit. Consider consulting a financial advisor to guide you through the options for managing debt in your specific situation.

Article Sources
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  1. Consumer Financial Protection Bureau. "Debt Collection Key Terms."

  2. IBIS World. "Debt Collection Agencies Industry in the US - Market Research Report."

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