When it comes to matters of business and finance, i am a very curious person.
Debt Collectors were on my mind the other day. So i looked up how to become a debt collector, how to purchase debt, etc. etc.
I found a website, apparently an ebay of sorts for buying and selling debt. Debt was bundled up into portfolios made up of several thousand past due accounts.
Assuming this website is legitimate, here is what a typical portfolio looked like:
Type: Retail Credit Card
Total Amount: $1,723,842.43
Number of Accounts: 2250
Bid: $15,000
So if i understand that right, a debt collector can buy each credit card for $6.67
I know that a lot of this debt is probably unrecoverable, so you have to make the ones who will pay, pay as much as possible.
It seems to me a good approach, and maybe best success rate would be to just offer a crazy settlement, “Look, i know you owe Costco $2000, but if you can pay $100 today, we will just settle it out, and your free of the debt.”
I think a lot of people would jump at that opportunity.
Is there something i am missing though? Does a debt collector have a legal obligation to collect as much as possible?
Well, as I understand it, if you buy this lot, you have paid $15,000 for more than $1 million in uncollected debt, spread over 2250 accounts. So you are going to need to collect at least $15,000 to recoup your investment, at a minimum, if all you did was make 2250 phone calls.
But in reality you are going to have to track some of these people down. Some of the debts may be too old. There is debt that’s more collectible and debt that’s less collectible, for instance, some of these people may have died, and you will have to put a claim in to their estate, and it being unsecured debt you’re going to be way back in line.
There’s also the question of what kind of proof of the debt you’re getting. Some people will ask for this.
So in other words, without having done this kind of work before you have no idea how much work it will take to collect enough of this particular lot to make it worth your while. Probably the only way to find out is to do it.
I sure don’t think you have to collect as much as possible, but it seems like you’re going to want to, in order to make your money back and make a profit, because if it was easy to collect these debts they’d have already been collected.
Right. Someone else has already been through these accounts and tried to collect whatever they could. It’s a couple of years old, but this article describes the business you’re thinking of getting into.
For one thing, you’re going to have to call up sad, desperate people and browbeat them into paying something on some old debt. Some of these people will have genuine tales of woe, while others will try to bullshit you. But neither will want to pay. And note that article says this stuff normally sells for 4.5 cents on the dollar. The portfolio you’re looking at costs less than a penny a dollar, so my guess is it’s really been picked over.
Many years ago, I worked at a collection agency. (I did clerical stuff: filing, computer input.) The outfit I worked for did not purchase debts. There’s a reason for that: it’s simply not worth the effort and the legal risks involved.
To address the OP: You would not be buying the credit cards, but the debt extended to the bearer of the card. Also, it is very easy to run afoul of state and federal laws relating to debt collection. Consider that you would have to determine accurately the last date the credit card account was active, if the debt collection has already been contracted to another agency, and a host of other issues before you even begin contacting the debtor. The reason that debt sale is bundled is to draw you in with a million dollar signs.
The concept exists elsewhere in finance as well, however. There is an entire industry, sometimes dubbed under the not-so-polite term “vulture fund”, whose business is to buy bad debt cheaply and then see how much of it they can recover. During the Greek and Argentinian sovereign debt crisis, for instance, there were vulture funds buying defaulted government bonds of these countries from investors, hoping they could either negotiate bilaterally with the debtor governments or find some jurisdiction with some property of the debtor government that they could seize.
To reply to this part: There are different ways debt collectors work. Some of them do what your initial post was about: They buy the distressed debt outright. In this case, they are under no legal obligation to collect as much as possible, but they have an economic incentive to do so out of their own interest. They are now the creditors of that debt; they are free to do with it as they please: Collect it (within the limits of what can lawfully be recovered from the debtors, of course); forgive it; let the statute of limitations take its course; or sell and assign it to yet another collector.
In some cases, however, debt collectiors work on a commission basis. The debt remains, legally, owed to the initial creditor, for instance a credit card issuer; but that creditor mandates the debt collector to collect it, paying him a percentage of the monies reovered. In that case, it’s possible that the terms of the contractual arrangement between creditor and collector specify obligations of the collector with regard to the efforts that need to be undertaken to collect.
John Oliver did this, forming Central Asset Recovery Professionals, or CARP, and buying $15,000,000 in medical debt owed by 9,000 people for $60,000.
In this case the debt had been legally written off by the original debtors and wholly belonged to CARP, so when CARP forgave the debts no further payments were required.
I think the point you’re missing is that these people haven’t been paying off the debt. Why would they suddenly decide to do so just because it was you asking? Sure, you’re asking for less money but they’re currently not paying any money.
There is no obligation to collect as much as possible, but you have to remember that these people have been hounded and threatened by experts for years to no avail, or the debt wouldn’t have been bundled and sold for a nickel on the dollar.
In cases where the debt has passed the statute of limitations making any payment can reset the clock and the entire debt can become due all over again so these people would have to be incredibly stupid to offer you any money at all, even pennies on the dollar.
And on top of that even if they took your word for it and gave you $100 to cancel a $2000 debt they would then be legally obligated to claim the $1,900 of debt relief as income and it would become taxable. They can have you hounding them for the debt or the IRS hounding them for the taxes. I know which one I’d be more worried about.
So, I have actually done this. This was over 20 years ago. I was invited to a seminar, "Banking on Success Strategies ". - that’s right, BOSS, because why be subtle. Anyway, it extolled the benefits of buying and trying to collect on these debt portfolios. The idea being that you make a profit ( buy for pennies on the dollar, settle for dimes) and the debtors get to take care of their debt for a big discount. Then it provided contact info for the companies selling these portfolios. Despite my firm resolve to not get talked into any nonsense, I got curious. I bought a portfolio, 100,000 worth of store card debt, for 1,500. What you got at the time was faxed lists in excel format. Name, soc sec# ( I think anyway, that seems odd, now), last know address, last date of payment, amount of debt. There’d also be credit reports on the debtors
There’d be some back-and-forth with the seller - some were out of statute or the name was clearly fictitious, those would be replaced with similar debts. In the end I had about 60 of them, ranging from 700 to 4K. I’d send letters to the last known address, offering to settle the debt for 25 or 35 cents on the dollar. I’d run skip traces on some of the more promising ones ( more info, higher amount, more recent payments). I’d follow up with phone calls.
Almost immediately, 2 settled for a little over 1k total. A week or two later another one for almost 500 bucks. At this point I had (almost) broken even, and I shredded the entire mess. The reason was the credit reports. They read like Dickens’ novels. It showed how easy it was to fall into debt, and how hard to get out of it. And the last thing I wanted to do was try and profit from those people’s misery. The truth is you can ( or at the time, could) make money on this. I just don’t want to. It’s not worth it.
My thought too - there are intricacies to the business, you probably don’t want to start cold.
I read all sorts of things about the rules of harassing debtors; so if the previous creditor/debt owner bothered the debtor, does that exclude you? I thought there were some significant penalties for violating the rules? Plus, if you have to go the small claims court route (say, to garnishee) do you have all the documentation necessary? (And small claims is an added expense…) Plus all the statute of limitations and date of most recent payment issues, etc. Like any business, the closer you get to it the more details there are and the more important they are.
One thought - if the debtor has to declare forgiven debt as income, does the owner of the debt get to claim uncollectible debt as a loss? I.e. I bought your $10,000 debt for $5 and now want to claim $10,000 in losses… (Or is that reserved for the original creditor who actually took the loss?)
The original creditor takes the loss, minus the amount they sold the bad debt for.
If you bought the debt, you could only count as a loss the amount you bought the debt for, and only by declaring that the debt was unrecoverable. So if you bought $1,000,000 in debt for $10,000, your maximum loss would be $10,000.
But you could threaten the debtors with a massive tax bill if they don’t pay up?
Including interest?
“I will forgive the $10,000 you owe, plus 6 years’ accumulated interest of $6,000, and notify the IRS you owe them taxes on that imputed income unless you pay me $1,000 forthwith…”
I bet a lot of (if not most) of the deadbeats on the list qualify under the insolvency exclusion and therefore wouldn’t have to pay taxes on the cancelled debt.
And, technically, the $15,000 in forgiven debt becomes taxable to the debtor (unless an exclusion or exemption applies) even if it’s not reported to the the IRS by the creditor. Yes, I realize that it is extremely unlikely that the debtor is going to report the forgiven debt if the creditor does not. Individual creditors do not report forgiven debit to the IRS. Reporting is only done by creditors that are financial institutions, government agencies, and organizations “whose significant trade or business is the lending of money, such as a finance company or credit card company (whether or not affiliated with a financial institution).” (See the Form 1099-C instructions. Skip half-way down to where it says “Specific Instructions for Form 1099-C.”) I don’t know what the IRS would do with a Form 1099-C filed by an individual.
To my knowledge, debt waivers are treated as contracts under common law. This means there must be mutual consent of the parties, and there must be consideration, i.e. some advantage given in return for the waiver. It’s not something the creditor can put into effect by a mere unilateral declaration.
Are you trying to tell me that if somebody owes me money, I cannot just say to them “Aw, just forget about it”?
And if it turns out there is no consideration given in return for the waiver, under law I must continue to try to collect the debt even if I don’t want to?
Just because a contract turns out to be unenforceable for some reason does not mean that the parties are prohibited from nonetheless abiding by its terms.
I never claimed otherwise. What I’m saying is that, to my knowledge, the usual doctrines of contract formation (mutual consent and consideration) apply also to waivers. In English law, the classic authority for this is Foakes v Beer. This is a post-independence case, so it hasn’t been automatically incorporated into American common law, but I think it’s not unlikely that a similar doctrine applies in America. Of course the creditor of a debt is under no obligation to enforce it irrespective of whether it has been validly waived or not.
Yes, but if they paid that $1000, they’d have $9000 in forgiven debt which would count as income.
As a threat it doesn’t make much sense because the debtors probably aren’t paying income taxes anyway, and wouldn’t owe $1000 in taxes on an extra $10,000 in income. It certainly wouldn’t be a “massive” tax bill.
These are the first few examples that popped up. I’m obviously not going to check all 50 states. British common law cannot be assumed to apply in the United States. Also, in the United States, statutory law takes precedence over common law, British or otherwise.
All these are saying is that if the creditor says “I’ll take $1000 for your $10,000 debt”, and the debtor pays the $1000, that extinguishes the debt.
What do you think they say? All these talk about an agreement. I guess your interpretation is that the amount could be $0, right? But a $0 acceptance would have to be part of an agreement, it couldn’t be imposed unilaterally.
Anyway, your strategy of blackmailing debtors with a “massive” tax bill is kind of silly. The tax bill on the small amount of “income” from a forgiven debt is going to be pretty small, not massive. And you have to throw away the debt to punish the debtor. I mean, it might be a scary sounding threat but once your bluff is called you have no incentive to carry out the threat, if it would even work.