What Is a Debt Buyer?
A debt buyer is a person or company that purchases delinquent or charged-off debt from lenders at a fraction of the debt's face value, then attempts to collect it.
Key Takeaways
- A debt buyer purchases delinquent debt from the original creditor and then attempts to collect it from the person who owes it.
- Because the original creditor may have given up on ever getting the money it is owed, it may be willing to sell the debt for pennies on the dollar.
- Debt buyers can use a variety of means to try to collect on a debt, but they are subject to state and federal laws intended to protect borrowers from harassment.
- Even if a debt buyer does not collect the full debt, it can still earn a profit by collecting a portion of it because it paid so little for it in the first place.
- Having a debt go into collections can do severe damage to a borrower's credit score.
How Debt Buyers Work
Debt buyers, such as private debt collectors, collection agencies, or even investors, make money by purchasing debt that the original creditor has given up on ever collecting. The creditor might, for example, be a credit card company, an auto lender, or a utility. Once it owns the debt, the buyer will aggressively try to collect as much of it as possible.
Debt buyers generally pay a very low percentage of the face value of the debt—sometimes just cents on the dollar.
Debt buyers range from small, private businesses to 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 do it for them. Collectively, the debt buying business has become a multibillion-dollar industry in the United States.
Why Debt Buyers Are Used and What Happens Next
If a lender is unable to collect payment on an outstanding debt after a certain period of time, it may seek to recoup at least some of its money by selling the debt to a debt buyer. This often happens once a debt has been delinquent for 120 or 180 days.
At that point, the lender may write off the debt on its books, referred to as a charge-off. Once the debt has been charged off, the lender will close the account. However, the borrower remains legally responsible for the debt, which may now belong to a debt buyer, until it has been paid off, settled, or discharged through a bankruptcy proceeding.
Some states have statutes of limitation on how long a creditor or collection agency may attempt to collect on a debt. The limit is often between three and six years. After that, the debt collector can no longer sue the debtor, but it may still attempt to collect on the debt in other ways as long as it complies with the law. Some debts, such as student loans, have no statute of limitations.
Having an account charged off can do serious damage to the borrower's credit score. The charge-off will remain on their credit reports for seven years from the date of their first delinquency (or missed payment). In addition, the debt collector will notify the credit bureaus that the debt is now in a collections account, adding another black mark to their credit reports.
Consumer Protections on Debt Collection
Debt collectors are subject to both state and federal laws regarding the lengths they can go to try to collect on a debt.
The Fair Debt Collection Practices Act is the principal federal law for consumer (but not business) debts. It lays out rules intended to protect debtors from harassment by debt collectors and includes guidelines for how, when, and by what means a debt collector is allowed to communicate with a debtor. If debt collectors violate the rules, debtors can sue them for damages.
Another federal law, the Fair Credit Reporting Act, governs how credit bureaus are allowed to use information about borrowers' debts in the credit reports they compile and sell. The law also gives individuals the right to dispute any errors they find in their credit reports and requires the credit bureaus to investigate. (Consumers can obtain free copies of their credit reports at least once a year at the official website for that purpose, AnnualCreditReport.com.)
How Do Debt Buyers Make Money?
Debt buyers make money when they collect enough of a debt that they have purchased to offset what they paid the original creditor for it. Because debt buyers typically purchase debt for pennies on the dollar, any recovery at all might represent a profit.
Are Debt Buyers Considered Debt Collectors?
Under the federal Fair Debt Collection Practices Act, debt buyers are considered debt collectors, along with debt collection agencies and companies, as well as lawyers engaged in debt collection.
Can a Debt Collector Charge You Interest on Your Debt?
A debt that has gone to collections can still accrue interest but only under the terms of the original contract. Debt collectors cannot increase the interest rate or impose additional fees beyond what that contract allowed.
What Happens if You Don't Pay Collections?
If you don't pay a debt collector or collection agency, it can sue you. It can take that action anytime until the statute of limitations on the debt has run out and the debt has become "time-barred" under the laws of that state. Even then, however, it can continue its attempts to collect the debt through other legal means.
The Bottom Line
Debt buyers purchase delinquent debt from creditors like credit card companies, utilities companies, and banks and attempt to collect payments from borrowers. 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 further damage to your credit. Consider talking with a nonprofit credit counselor to guide you through the options for managing debt in your specific situation.
