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By Stephen Pederson

Secrets of the Debt Buying Industry

So Who Owns Your Debt and How Much did They Pay for it?

In January of 2013, the Federal Trade Commission (FTC) issued a report on the Debt Buying Industry.  If you do not know this already, companies will sell the debts owed to them to other companies.  Often, this is because they are deemed difficult or impossible to collect.  These debts are usually in arrears of 6 months or more and the companies that originally owned the debt instruments have given up on collecting them and are simply cutting

Credit Card and Mouse

Debt Buyers

their losses by selling them to other companies for cents on the dollar.

The reason that the FTC undertook this study is for this simple reason: of all the industries that fall under the mandate of the Federal Trade Commission, the industry that generates the single highest volume of complaints by consumers is the debt collection/debt buying industry.

 

Interesting facts about the Debt Buying Industry

Most of the debt that is bought by the Debt Buying Industry is consumer credit card debt.  When a debt buyer purchases the debt they are entitled to collect it from the debtor (consumer) who signed on the dotted line.  Just because the debt is now owned by someone else does not mean that your obligations have changed.  The new owner of your debt is entitled to collect it and can use the legal system to help them collect it.  Here are some facts that you probably did not know about the sale of debt:

  •  Nine (9) companies bought the majority of the debt the FTC studied 76%
  • The information the FTC reviewed contained 90 million consumer accounts
  • The face value of the debt studied was $143 billion – most of it credit card debt
  • The debt was purchased for a cost of $6.5 billion
  • Older debt is worth much less than newer debt – the price of 15 year old debt is virtually worthless

If you do the math, the average debt was bought for 4.54545 cents on the dollar.  In other words, the buyers of your debt are on average paying only 4% of the value of the original debt.

What you also likely do not know is what is included with the purchase of the debt.  Not only does the company gain the rights of the debt instrument, they all receive the following from the original debt owner:

  • your social security number
  • name of the original creditor and account number
  • date of last payment
  • date the account was written off

What is interesting about the sale of debt is what is often not included in the sale:

  • Information on whether the consumer disputed the debt
  • A breakdown of the original principle, interest, and fees
  • Account statements or terms and conditions of credit
  • Warranties on the acccuracy of the information – essentially, the debt information is sold “as-is”

Debt buyers do have access to information from the original owner of the debt, but there are limitations and restrictions.  Access is usually restricted to a period of six (6) to thirty-six (36) months and equal to ten (10%) to twenty-five (25%) of the number of debts in the portfolio purchased.  After that period, each document requested came with a fee ($5 to $10) and up to a two (2) month waiting time.  In most cases, the availability of the documents are not guaranteed by the debt seller.  Additionally, if the debts were sold again to a secondary buyer, the original debt seller had no obligation to deal directly with the new (secondary) owner of the debt.  This could add additional fees and delays to the secondary debt owner.

 

Disputed Debt

Of the Debt purchased, 3.2% was in dispute by the consumer resposible to pay.  This is equal to about one (1) million debts per year.  According to the Debt Buyers, 51.3% of the disputes were allegedly validated or proved as legitimate, however that still leaves almost 500,000 debts per year not verified as legitimate.

Most states have a statue of limitations on the collection of debt after a stated period.  Typically, this stated period is between three (3) and six (6) years for credit card debt.  Most of the debt that is purchased has not reached the statute of limitations.  Most credit card companies sell their debt after it has been in arrears for six (6) months.

Per the FTC study:

There was no statistically significant relationship betweeen the likelihood of a dispute and the debt’s age, face value, or whether the debt had been purchased from the original creditor or a reseller.

For further reading on the subject, see the original Federal Trade Commission study at:

The Structure and Practices of the Debt Buying Industry

Or, from the Wall Street Journal:

Boom in Debt Buying Fuels Another Boom – In Lawsuits

Picture courtesy of morgueFile.com

 

 

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