Buying Bad Debt: Excellent Profit Potential For Investors

Buying Bad Debt: Excellent Profit Potential For Investors

Buying bad debt is growing at a rapid pace in this country. One of the main reasons for this is steady high unemployment, growing consumer debt and default rates, due to the poor economy.Debt portfolios can usually be bought for pennies on the dollar. Such deeply discounted pricing can potentially mean great profits. Pricing is based on a few factors: the freshness of the accounts, and the number of times they've been placed previously with a collection agency. Accounts having been placed with more than one collection agency are discounted even greater.

Companies buying debt range from private equity to hedge fund investors. It can also include debt collection law firms, collection agencies, as well as individuals.

Delinquent accounts are purchased from creditors at a greatly reduced amount less than the original face value. Debt buyers then either collect these on their own (these are called "active debt buyers"). Or, they can hire third party collection agencies to collect for them. These are called "passive debt buyers." Sometimes, these accounts are resold and repackaged to other buyers.

Charged off credit cards, cash advance loans, medical and municipal utility debt make up most of debt portfolios that are sold. Banks and credit unions often sell off their closed loans, as well as closed checking accounts, known as demand deposit accounts (DDA).

The History of Buying Bad Debt

Buying bad debt began in America as a result of the savings and loan crisis in the 1980's. During this period, savings and loan institutions (also called thrifts) were closing at an alarming rate and the Federal Deposit Insurance Corporation (FDIC), which guarantees deposits up to a certain amount, acquired the assets of the S&L's to pay for the expenses related to paying back the closed banks depositors.

Whenever the FDIC, also in the end the Resolution Trust Corporation (RTC) took charge of the assets they had to locate institutions, organizations in addition to private investors considering purchasing debt, and that would be ready to buy the assets of closed banks including both performing and non-performing (delinquent or charged-off) accounts.

The RTC conducted auctions all over the country, allowing various parties to bid on these mixed asset portfolios. Bidders weren't permited to make evaluations of assets before bidding on them. Most buyers didn't know what they had purchased until after the auction.

The supply of such assets for the general public was the catalyst which introduced buying bad debt as an industry.

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