Understanding the Credit Lifecycle Part 5:

Key Takeaways

• Creditors often sell charged-off accounts to debt buyers who pay pennies on the dollar for your account.
• You have the same loan terms and the same legal obligation to repay the debt to the buyer. You simply pay a different creditor.
• Because debt buyers pay significantly less for your account, the company can still turn a profit when they accept a settlement offer.

What Happens if My Debt is Sold?

This is Part 5 in a 5-part series on the Credit Lifecycle. Previous posts include Understanding the Value of Your Debt Over Time, Pre-Charge-Off Collection Practices, The Difference Between 1st and 3rd Party Collections, and What Happens to Debt After Charge-Off.  It’s amazing all that happens with all that credit card debt! In the final installment of the series, we will explain what happens when an account gets sold.

The Business of Buying Debt 

Creditors liquidate a portion of their charged-off debt portfolios and sell them to debt buyers for pennies on the dollar.  Like lenders, debt buyers evaluate accounts based on the potential to recover the delinquent debt. The longer the account remains without payment, the less value it holds to the buyer. 

In addition to the severity of the delinquency or time which has passed since the account charged-off, the value of the debt is also determined by the presence of collateral, if any is attached to the loan. Unsecured debt, like credit card accounts, does not provide the same level of recourse as secured accounts, making them significantly less valuable. 

When a lender secures a debt, they can repossess or foreclose on your collateral (home, car, boat, other pledged collateral, etc.). Unsecured debt does not hold collateral for the purpose of debt repayment.  

When and How is Debt Sold?

A lender can choose to sell your account at any time, but most credit card issuers will sell accounts in bulk after the account charges off. See part 4 of the series: What Happens When My Account Goes to Charge-off.

In most cases, lenders bundle a package of debt of varying debt ages, balances, and state jurisdictions to a debt buyer. The buyer then bids to purchase the bulk portfolio of accounts, and the high bidder then owns the debt, and the title of each account is transferred to the buyer, giving the buyer the legal right to collect unpaid balances based on the original terms of the agreement. 

Debt sold pre-charge off is worth significantly more than accounts sold post-charge-off. For example, pre-charge-off debt might sell for 0.40 cents on the dollar, depending on a number of factors such as age, balance, state of residence, and the likelihood of collection, where post-charge-off debt might sell for $0.10 – $0.20 cents on the dollar, based on similar factors. 

When a debt buyer pays so little for an account, they are typically willing to accept significantly less than the full amount owed on the account.  This can give a professional debt negotiator significant leverage when offering a settlement for less than the full amount owed.

What Happens to My Account?

Each time a creditor sells an account for which you owe a balance, you receive a written notice from the new owner. The FDCPA (Fair Debt Collections Practices Act) requires debt buyers to notify all account holders within 30 days of the purchase. The company must include account details, contact information for the new debt owner, along with a notice of your right to verify or dispute the debt within 30 days of receipt of the debt validation notice. 

Collection efforts often become more aggressive as time passes, and each time a new buyer takes over the account. 

What Are My Legal Obligations to Repay the Debt?

Regardless of who owns the debt, you have a legal obligation to repay any outstanding balance.  While the statute of limitations to sue in an effort to recover the debt varies by state between 4 and 8 years, any partial payment made on the account may reset the statute of limitations period, allowing the new debt owner additional time to recover the debt through litigation.

Debt Collection on Sold Debt

Debt sold to a debt buyer provides an opportunity for you to eliminate the debt for a fraction of the outstanding balance through a settlement. Secondary buyers are happy to collect something, providing a legal way to eliminate existing credit card debt at a discount. 

When a creditor sues and obtains a judgment against you, the creditor is less motivated to settle the debt, because they have more legal channels to collect the debt through such as wage garnishments, property liens, or the seizure of assets they can use to enforce their judgment. 

Final Thoughts

Agreeing to pay off a debt for less than the full balance after it is sold can prevent a lawsuit and eliminate your legal obligation to make any further payments on the debt in question. There are debt settlement professionals who can help. Those that excel are those that listen to your challenges, understand your short-term and long-term goals, and build a plan that works to help you pay down debt in a way you can manage and accomplish successfully. 

FAQ

• How does debt buying work?

   Companies that lend money can package a group of accounts and sell it to another company or debt buyer. Companies that buy debt pay a discounted price for the account package based on the strength of the debt. Accounts with a strong payment history will cost more than those with missed payments. When a buyer purchases an account, the same terms apply to the loan. You just pay a different creditor. 

• How much did a debt collector pay for my delinquent account?

  Creditors package debt and sell the group of accounts to debt buyers. The buyer will bid on the loans and the highest bidder wins. The poorer the quality of the debt, the less it is worth to a third party. The longer your account goes without payment the less value it has to a debt buyer. After charge off, a buyer might pay 0.10 to 0.20 cents on the dollar for defaulted loans. 

• Why will debt buyers negotiate a lower payment on my delinquent debt?

  While a debt buyer may pay pennies on the dollar for your account, you still owe the full amount of the debt. However, because they have less invested, they can accept a lower payoff for the debt and still make a profit.