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Credence debt collection focuses on managing and trading unpaid debts, often originating from industries like telecommunications, healthcare, and utilities. Companies sell these overdue accounts to third-party buyers who purchase them at a fraction of their value, aiming to recover the full amount. This process helps businesses turn nonperforming assets into cash while outsourcing the recovery effort to specialized agencies.
Understanding these aspects ensures better decision-making in buying, selling, and managing credence debt portfolios.
Credence Debt Collection: Key Statistics and Market Overview
Credence debt refers to high-volume, low-value debt that primarily originates in industries like telecommunications and healthcare. Unlike debt from banks or credit cards, this type of debt arises when customers fail to pay for services such as mobile phone bills, hospital treatments, or utility charges. The term "credence" emphasizes the trust-based nature of these services - providers deliver the service upfront, expecting payment later. Understanding how this works is critical for managing and trading these debt portfolios effectively.
Tracking unpaid accounts in this category can be tricky, especially in telecommunications. Mobile users often change addresses or switch providers, making it harder to follow up on unpaid bills compared to fixed-location services like landlines. Professor Dalié Jiménez of the University of California, Irvine School of Law, explains:
Many of these debts will be sold to debt buyers for pennies, or fractions of pennies, on the dollar.
The numbers are staggering. Medical debt alone accounts for 57% to 58% of all third-party collections tradelines on credit reports, while telecommunications and utility debts make up about 20%. By 2018, over one-in-four consumers (28%) with a credit report had at least one third-party collections tradeline.
Credence debt has some unique traits that distinguish it from other types of debt. In telecommunications, unpaid bills often result from "surprise charges" hidden in contract fine print, overuse of services, or early termination fees when customers switch carriers for better deals. The Consumer Financial Protection Bureau highlights:
Roughly half of all collections tradelines that appear on credit reports are reported by debt collectors seeking to collect on medical bills claimed to be owed to hospitals and other medical providers.
Healthcare debt, on the other hand, is shaped by factors like complex billing systems, gaps in insurance coverage, and errors in billing. The amounts owed can change due to insurance adjustments or charity care policies. Economic conditions in specific regions also play a role - areas with higher unemployment or lower median incomes often have portfolios with lower recovery rates.
In the secondary market, these debts are typically sold at steep discounts. For example, medical debts that are 24 to 36 months old might sell for just 5% to 10% of their original value. A $500,000 portfolio of medical debt with a large share of uninsured patients and limited recent payments might only be worth $25,000 to $50,000.
The lifecycle of credence debt follows a fairly predictable pattern. It starts when a service is provided - like a medical procedure or mobile plan - and becomes delinquent if the customer doesn’t pay. Creditors usually charge off debt once it’s 180 days overdue.
At the 180-day mark, creditors decide whether to collect the debt themselves, outsource it, or sell it. First-party collection happens early, often within 1–30 days of a missed payment, to maintain the customer relationship. Third-party collection, which handles older accounts, takes over when internal efforts fail. Globally, third-party collectors handle 42% of the debt recovery market, while first-party collectors manage 36%, and debt buyers account for 22%.
Once sold, the debt enters the secondary market, where buyers purchase portfolios at significant discounts. These transactions may be one-time deals or part of "forward-flow" agreements, where accounts are sold continuously over time. Initial buyers might collect the debt themselves or resell it to other buyers, but each resale increases the risk of data issues or missing documentation. For banks, selling these debts offers a clear advantage:
Turning nonperforming assets into immediate cash proceeds and reducing the use of internal resources to collect delinquent accounts.
Understanding this lifecycle is key for analyzing and managing debt portfolios effectively.
Buying a credence debt portfolio without a thorough evaluation can lead to serious financial losses. The secondary debt market in the U.S. sees billions of dollars in face value change hands every year. Debt buyers typically pay 3% to 4% of the face value, with a 2013 Federal Trade Commission study reporting an average price of 4 cents on the dollar across more than 5,000 portfolios. At such low prices, even minor errors in evaluation can wipe out potential profits.
The most important step in assessing a credence debt portfolio is verifying the chain of title - ensuring an unbroken line of ownership from the original creditor to the current seller. As Cosmopolite emphasizes:
The most critical element [is] Chain of title. The buyer must verify an unbroken chain of ownership from the original creditor through every subsequent sale. Gaps in the chain of title make the debt unenforceable in court.
Without proper documentation, proving ownership of the debt becomes impossible. Each transfer of account information increases the risk of losing or corrupting key details.
To comply with the Fair Debt Collection Practices Act (FDCPA), Fair Credit Reporting Act (FCRA), and the CFPB's Regulation F, confirm that each account includes essential documents like the original contract, recent account statements, charge-off notices, and prior collection records. Regulation F also requires validation details, such as the debt amount as of a reference date and an itemized breakdown of interest, fees, and payments.
Use transactional sampling to validate data accuracy before finalizing the purchase. Examine the timeline for each account, including the open date, last payment date, charge-off date (typically 180 days past due), and the gap between the last payment and charge-off. Request historical liquidation data to understand how similar accounts have performed under previous collectors. Peter Holland, Director of the University of Maryland School of Law Consumer Protection Clinic, cautions:
The accounts are sold 'as is,' pursuant to contracts in which the banks state that the debts may not be owed, the amounts claimed may not be accurate, and documentation may be missing.
After completing due diligence, shift your attention to identifying potential risks that could affect enforceability.
Credence debt portfolios often include accounts that are legally unenforceable. The Office of the Comptroller of the Currency highlights several types of debt that should never be purchased: settled or paid-off accounts, debts of deceased individuals, debts discharged in bankruptcy, accounts in active litigation, and debts arising from fraud or identity theft. Additionally, avoid accounts protected under the Servicemembers Civil Relief Act, accounts belonging to minors, accounts in disaster-affected areas, and those nearing the statute of limitations.
Screen portfolios for time-barred debt, which refers to accounts that are past the statute of limitations for legal action in their respective states. Regulation F prohibits collectors from initiating or threatening lawsuits to recover time-barred debt. Check for accounts where consumers have disputed the debt in writing; under the FDCPA, collection efforts must stop on these accounts until verification is provided. Similarly, identify accounts where debtors have issued "cease communication" orders or specified inconvenient times or places (e.g., their workplace) for contact.
Include repurchase clauses in your purchase agreements to allow for the return of uncollectible accounts, such as those involving deceased individuals, bankruptcy, or fraudulent activity. Investigate the seller's background, including their financial stability, licensing, and history of consumer complaints. Non-compliance with the FDCPA can result in civil penalties of up to $1,000 for individual cases and up to $500,000 or 1% of net worth (whichever is less) for class action lawsuits. Taking on legal risks tied to previous collection violations can turn what appears to be a profitable portfolio into a costly liability.
After completing thorough due diligence, the next step is to secure your portfolios by identifying dependable sources. The acquisition process requires understanding where to find these portfolios, how pricing works, and how to organize accounts for maximum recovery efficiency.
Credence debt portfolios are often sourced from industries like telecommunications, utilities, energy, fintech lending, and healthcare. These sectors generate accounts when customers fail to pay for services. Since credence debt is unsecured (lacking collateral), verifying that the original service was indeed delivered is critical.
Pricing varies based on the age of the debt. Fresh charge-offs (0–6 months) typically sell for $0.03–$0.20 per dollar, while older accounts (24+ months) or those out of statute may sell for as little as $0.001–$0.05 per dollar. Jeffery Hartman, Director of Portfolio Liquidity & Asset Disposition at DebtLink, emphasizes:
"There's no such thing as 'bad debt,' only bad pricing."
Platforms like Debexpert offer a centralized marketplace for buying credence debt portfolios. Buyers can explore portfolio listings and participate in different auction formats, including English, Dutch, sealed-bid, and hybrid auctions. The platform ensures secure file sharing with end-to-end encryption, allowing buyers to review masked files and portfolio analytics before committing. Features like real-time buyer activity tracking and notifications for desired debt types make it easier to identify attractive opportunities.
It's essential to consider state-level regulatory and legal differences when assessing portfolios. Request historical liquidation data from sellers to evaluate how similar accounts have performed in the past. Also, ensure that retrade clauses are included in the purchase agreement. These clauses allow buyers to return uncollectible accounts, such as those involving deceased individuals, bankruptcies, or fraud cases.
Once the acquisition is complete, the focus shifts to organizing and managing the portfolio for efficient recovery.
After acquiring a portfolio, start by segmenting accounts based on factors like age, balance size, and the validity of contact information. Prioritize skip tracing to avoid wasting resources on invalid contacts. Accounts with verified contact details and recent payment activity should take precedence in your collection strategy.
A 3-phase waterfall strategy can help streamline collections:
Predictive scoring models are invaluable for optimizing collections. These models combine internal data, external credit information, and skip tracing results to assign risk scores to individual accounts. Monitor key performance indicators (KPIs) such as Right Party Contact (RPC) rates, liquidation percentages, and balance-to-settlement ratios in real time to fine-tune your approach. Masood Akhtar, Global Portfolio Marketing Manager at Experian, explains:
"NBA optimization presents a game-changing opportunity for lenders... pinpointing the most effective communication channels for each borrower."
Lastly, use predictive analytics to identify accounts with self-cure potential - those likely to pay without active intervention. Shifting these accounts to passive settlement offers or reselling them to secondary buyers can significantly reduce operational costs while maintaining recovery efficiency.
Protecting your investments and maximizing recovery requires a proactive approach to risk management, from acquisition to collection. By addressing potential pitfalls early and maintaining compliance throughout the process, you can safeguard your portfolio and improve overall returns.
Focus on data integrity and compliance. Adhering to regulations like FDCPA, Regulation F, and TCPA is non-negotiable. Issuing debt validation letters as required ensures the legal soundness of your accounts and secures their future collectability.
Leverage advanced skip-tracing tools. These tools help identify consumers with protected statuses - such as active military members, deceased individuals, or those in bankruptcy - reducing the risk of regulatory violations. By improving data accuracy, you can achieve better results. For instance, a 10% boost in Right Party Contact (RPC) rates through precise data verification can significantly cut down wasted efforts and enhance recoveries.
Analyze state-level statutes of limitations. Knowing the legal recovery timelines in different jurisdictions helps you avoid purchasing debts that can't be enforced. Some states allow garnishment or judgments, while others make legal action nearly impossible. This analysis complements your initial due diligence, strengthening your portfolio strategy.
Clean and update data regularly. Keeping contact records up to date not only improves the accuracy of predictive models but also avoids errors that could lead to compliance issues. Continuous data cleaning enhances both operational efficiency and regulatory adherence.
Once risks are under control, the focus can shift to strategies that boost collection performance.
Behavioral segmentation for smarter prioritization. Moving beyond traditional credit scoring, behavioral models assess a debtor's "willingness to pay" and other factors. This allows you to zero in on accounts most likely to respond, improving liquidation percentages and overall recovery rates.
Flexible payment options drive engagement. Offering tailored solutions, such as settlement plans and virtual negotiators like chatbots, makes it easier for debtors to engage. Masood Akhtar, Global Portfolio Marketing Manager at Experian, highlights the importance of optimizing communication strategies:
"NBA optimization presents a game-changing opportunity for lenders... pinpointing the most effective communication channels for each borrower."
Track KPIs in real time for faster adjustments. Metrics like RPC, liquidation percentage, and balance-to-settlement ratios provide actionable insights. Predictive analytics can also identify accounts likely to self-cure - those that may pay without active intervention. Redirecting these accounts to passive settlement offers or selling them to secondary buyers can cut costs while maintaining recovery levels.
| Metric | What It Measures | Why It Matters |
|---|---|---|
| Gross Yield | Total recovered amount vs. purchase price | Reflects overall profitability |
| RPC Rate | Right Party Contact rate | Indicates data quality and contact efficiency |
| Liquidation % | Percentage of total balance collected over time | Tracks the speed and effectiveness of recovery |
Debexpert offers a specialized platform tailored to streamline the complexities of trading credence debt portfolios. When dealing with these portfolios, having a secure, efficient, and transparent marketplace is critical. Debexpert delivers this by connecting vetted buyers and sellers, providing accurate valuation tools, and ensuring smooth transactions - all within a comprehensive online marketplace designed for debt trading.
Debexpert gives sellers the flexibility to choose from multiple auction formats, including English, Dutch, Sealed-bid, and Hybrid auctions. This allows sellers to match the auction type to their portfolio and current market conditions. Security is a top priority: the platform uses end-to-end encryption to safeguard all file exchanges and communications, ensuring debtor information stays protected during due diligence. Additionally, real-time tracking lets you monitor buyer activities like portfolio views, masked file downloads, and bid placements, whether you're on a desktop or mobile device.
The platform connects sellers with over 1,000 vetted investors across the country, reducing counterparty risks while fostering competitive bidding. Expert portfolio valuations - carried out by a team with over 100 years of combined experience in debt trading - help establish realistic price expectations.
These features work together to create a reliable and results-driven trading environment, setting the stage for superior outcomes.
To maximize results, start by requesting an expert valuation. This provides a clear understanding of the market conditions for your specific debt type. The Debexpert team can also guide you on whether breaking larger portfolios into smaller pools might attract more targeted buyers and enhance overall returns.
For example, in March 2023, Andy, CFO of Asbury Management Group, Inc., used Debexpert to sell a debt portfolio and achieved top-dollar results. Similarly, in September 2022, Sergi Omar, Managing Director of CheapCars, leveraged the platform for NPL auctions and exceeded his firm's price expectations by 2.5 times.
Debexpert provided access to numerous buyers and secured top prices for our accounts. – Andy, Chief Financial Officer, Asbury Management Group, Inc.
The platform's real-time dashboard is a powerful tool for tracking buyer engagement before the auction kicks off. High rates of portfolio views and file downloads often indicate strong demand, which can help you fine-tune your reserve price. Additionally, the encrypted messenger feature lets you respond quickly to buyer inquiries, keeping the bidding process lively and competitive.
Success in credence debt collection hinges on a mix of thorough preparation, smart risk management, and leveraging modern technology. While we've covered specific tactics earlier, the real challenge lies in weaving these components into a unified approach.
Start with due diligence - this means verifying ownership chains, ensuring data accuracy, and fully understanding the characteristics of the debt portfolio before making any moves. From there, focus on risk management by filtering out problematic accounts, using tiered collection strategies, and staying compliant with regulations like the FDCPA, FCRA, and GLBA to steer clear of legal troubles.
Adding advanced technology into the equation takes things to the next level. Tools like Debexpert make portfolio trading simpler by connecting trusted buyers and sellers and offering the insights needed to make smart, informed decisions. By combining these strategies, your approach to credence debt collection can stay adaptable and ahead of the curve.
Credence debt refers to overdue accounts that are typically managed by third-party agencies. These debts often come from less-documented sources, such as telecom bills or loans from lenders. Instead of being handled individually, they are usually bundled into larger portfolios and traded in the debt market.
On the other hand, credit card debt is much more specific and well-documented. It represents money owed directly to credit card issuers. These issuers either collect the debt themselves or sell it to agencies, but the accounts involved usually have clear and detailed histories.
To verify the debt, you'll need documentation that traces its ownership history. This should include key details such as the original or charge-off account number, the name associated with the debt, and, if relevant, the names, addresses, and ownership dates of each party that previously owned it. Additionally, ensure you get copies of any assignment or transfer documents that establish this chain of ownership.
To steer clear of buying time-barred accounts, it's crucial to check the statute of limitations for each debt. These time limits differ depending on the state and the type of debt, so make sure the debt is still within the legal timeframe for collection.
Be careful - acknowledging or making a payment on a time-barred debt can restart the clock on its enforceability in many states. Always ask the seller if an account is time-barred before making a purchase, and avoid taking any steps that might legally reactivate the debt.
More than a decade of Ivan's career has been dedicated to Finance, Banking and Digital Solutions. From these three areas, the idea of a fintech solution called Debepxert was born. He started his career in Big Four consulting and continued in the industry, working as a CFO for publicly traded and digital companies. Ivan came into the debt industry in 2019, when company Debexpert started its first operations. Over the past few years the company, following his lead, has become a technological leader in the US, opened its offices in 10 countries and achieved a record level of sales - 700 debt portfolios per year.
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