Buying debt is a big business.
Gaining ground in the savings and loan crisis of the 1980s-90s, debt buyers today primarily deal with delinquent credit card accounts, and defaulted personal loans.
In the last few years, guidance on debt selling from the Office of the Comptroller of Currency and actions against creditors, collection agencies and collection law firms by the Consumer Financial Protection Bureau have led to improved debt buying and collection practices, and some states have tightened regulations. However, it remains a lucrative industry, and some participants still prey on uninformed consumers. That is why it’s important to understand how your debt may be handled if it has been, or may soon be, sold to one of these companies.
It is also important to keep in mind that the original creditor is not obligated to inform you of the sale of your debt, although some will send you a “goodbye” letter to notify you. Also, if your debt is purchased, the buyer can report this to the credit bureaus as a collection account, hurting your credit.
How does debt buying work?
After a consumer has stopped paying a debt for typically six months, the creditor is likely to charge it off, meaning it is declared a loss. To recoup some of that loss, the creditor can sell it to a debt buyer, often for pennies on the dollar. Once sold, however, the original creditor no longer has control over how the debt gets collected or what tactics the new owner uses. So, to maintain some control over communication and still recoup some of the amount owed, the original creditor may outsource the debt to a contingency collection agency or law firm. Contingency firms make a percentage of what they get the consumer to pay.
If the creditor sells the debt, it will probably package it with similar debts by type, age, location or other criteria and sell them as a portfolio. Creditors will market the packages to debt buyers, with the highest bidder often getting the portfolio. In years past, the debt was sold as is, which meant the seller didn’t verify the accuracy of the information, and there was little obligation to provide supporting documentation.
Recent regulations have improved the information provided in a debt sale, and it is more common for debt buyers to have enough information and backup documentation to meet the standard for them to collect the debt, says Michael Bovee, co-founder of Resolve.
Once the debt is sold, the original creditor has no claim on it and cannot settle with you.
What do debt buyers do with your account?
Once a debt buyer purchases your debt, it will likely notify you — in writing or with phone calls — that you must pay up. The buyers have several options for pursuing payment, such as:
- Collect on it. The debt company may have a collection arm that will try to get you to pay the debt.
- Hire a third-party collection agency. For a consumer, there is little difference in dealing with a collection agency employed by your original creditor versus one hired by a debt buyer. The goal is to get you to pay.
- Use a collection law firm. Outsourcing debt collection to a law firm provides the debt buyer with a route to suing you for repayment. This law firm may work on a contingency basis.
- Resell it. The debt buyer may repackage your debt and sell it to another debt buyer. It does not have to pass along what may seem to you to be relevant information, such as if it tried to collect from you, if you contested the validation of the information, if the statute of limitations on the debt has expired, etc. This means that even if you have tried to rectify the situation with a debt buyer, a subsequent debt buyer could come after you again for the debt.
How Should You Respond?
When you receive a letter about your debt from a company you don’t know, it can be confusing. It is important to read the letter to try to determine if this is your debt, if the information is correct and who owns it now. Be aware of several issues that can shape your response to the notice:
- Validation – If you don’t recognize the debt as yours or you believe the information is incorrect, request validation in writing and send it to the company by certified mail with return receipt requested, Bovee says. You may not receive a response, but if you do, the letter should include the name of the original creditor, the amount you owe and possibly documentation that supports the claim. Even if the debt buyer ignores your validation request, it can sue you for the debt. Also, Bovee says, if the debt is yours and you hope to negotiate a settlement, it can be counterproductive to challenge it with a validation request.
- Statute of Limitations – The statute of limitations on a debt varies by state and usually runs three to six years but can be as long as 10 years. It’s important to know when the time expires because you can’t be sued or even be threatened with a suit for that debt afterward. (You can view a chart of the statute of limitations by state here.) If the time has expired, you still have an obligation to pay your debt. But be careful not to make even a small payment against this debt because that can restart the clock and negate your statute of limitations defense. As some debt collectors will try to get you to make a payment, it’s best to check with a consumer law attorney before taking any action. Many lawyers provide a free consultation.
- Settlement – The debt buyer probably paid pennies on the dollar for the amount you owe and may be willing to settle your account for a percentage of the debt. This is not always the case. But often, if you can put together as much as half of what you owe or can pay that amount via a payment plan, consider contacting the collector to negotiate a settlement.
- Be proactive – Many people find out that they were sued on a debt only when their wages are garnished because they’d never received the court notification of the lawsuit. Get into the habit of checking your credit reports to see if there is any debt listed that you were not aware of, says Jeremy S. Golden of Golden & Cardona-Loya LLP. He’s defended hundreds of clients against lawsuits filed by the largest debt buyers and has seen only slight improvement since the increased regulations. He has found that debt sellers and buyers do only minimal compliance. He’s even seeing that many don’t have the documents to support their lawsuits. He recommends contacting a consumer law attorney for guidance if you receive a letter that your debt has been sold.
The Big Debt Buyers
There are debt buyers of various sizes in the marketplace, but most debt is purchased by four companies: Midland Funding, Portfolio Recovery Associates (PRA), Cavalry Portfolio and LVNV Funding. Although Golden says he sees little difference in his dealings with the big four, Bovee has found important nuances in how they each handle collections, reporting and settling.
Midland Funding: One of the oldest and largest debt buyers, Midland Funding is owned by Encore Capital Group. Its sister company, Midland Credit Management, handles its account collections. Midland is the first in the industry to introduce a Consumer Bill of Rights. Learn more about Midland Funding.
Portfolio Recovery Associates: Also one of the largest debt buyers in the world, PRA collects on its accounts rather than outsourcing collections, but has a poor reputation for customer care. It does, however, request that the PRA account be removed from consumer credit reports about 30 days after the last payment posts regardless of the debt’s age. Learn more about Portfolio Recovery Associates.
Cavalry Portfolio: Presenting itself as a consumer-friendly purchaser of “non-performing consumer loan portfolios,” Cavalry puts its core values — including integrity, respect and communication — on its website. Bovee has found Cavalry to be more approachable and fair to consumers. Learn more about Cavalry Portfolio.
LVNV Funding: LVNV purchases delinquent accounts domestically and internationally from original creditors as well as from other debt buyers. It outsources the collection on those accounts to Resurgent Capital Services LP, a third-party debt collector. Resurgent may then outsource the debt to yet another collection agency. Learn more about LVNV Funding.
No matter the debt buyer, if you have received a “goodbye” letter from your creditor, a notification from a debt buyer or collection letter from a debt collection agency, it’s time to assess your options for resolving your debt. You can access the Resolve financial management platform and receive guidance from our experts for free. Get started here.