Most people are familiar with debt collectors, but fewer are familiar with debt buyers. Debt buying happens in the background: very few people know about it. That said, there is a growing interest in debt buying, because investors acting alone or in companies know it can be an extremely profitable business.
If you are interested in this industry and want to learn how to become a debt buyer, this article is for you. Here we outline the crucial steps you need to take to become a debt buyer, from forming a business entity to doing the due diligence necessary to enter at times risky financial deals.
A debt buyer purchases other companies’ debt at a significant discount. These debts are usually delinquent or charged off by the seller, then collected by the debt buyer or a collection agency they hire.
Consumer debts commonly purchased include:
When debt buyers collect on the debt, all the money they collect is theirs to keep, or they work out to keep a certain percentage of the recovered money. Companies often sell consumer debts to debt buyers when a debt is very long overdue and there’s a lower chance it will be paid back.
Typically, the longer a debt goes unpaid, the less a debt buyer will have to pay for it. Debt buyers may buy large portfolios of debt at a time, and when they purchase the debt, it is entirely theirs to deal with.
The primary difference between debt buyers and debt collectors is the ownership status of the debts. Debt collectors are agents acting on behalf of the debt owners. Debt buyers, in contrast, become the principals (and not the agents) vis-à-vis the debts, and can then hire agents to help them collect it.
A debt buyer is a type of debt collector who purchases a creditor's debt at a discount in order to collect on it. Creditors sometimes prefer selling their debts at a loss to debt buyers as a tax write-off.
The debt buyer pays fair market value for the debt’s outstanding balance. The debt buyer then collects on the accounts they have purchased, either directly on their own, or through third party collection agencies or law firms.
Debt buyers purchase charged-off or delinquent accounts that arise from many types of accounts. Examples include credit cards, installment loans, automobile loans, medical expenses, retail sales accounts, telecommunications and cellular telephone bills, and utility bills.
Debt buyers make money by acquiring debts cheaply and then trying to collect from the debtors. Even if the debt buyer collects only a fraction of the amount owed on a debt it buys — say, two or three times what it paid for the debt — it still makes a significant profit.
Debt buying processes vary depending on the reasons for purchasing the debt and the type of debt you are interested in buying. For example, you may be interested in buying debt so that you can legally enforce repayment from the borrower.
Even with your purpose defined, you must narrow down the type of debt you want to purchase, which could include:
Debt buying is a diverse and complex business, so you must be clear early on about the particular niche you want to enter.
The next step is to determine what type of business entity will best suit your intended business activities. You need to consider legal factors, such as how to protect your personal assets in the event of a lawsuit started against you, and tax factors, such as how to structure the entity for maximum tax efficiency depending on expected income levels.
Limited Liability Companies (LLCs) are the easiest to establish and entail the lowest compliance requirements and fees throughout the year. Still, a corporation may be preferable if, for example, the owner expects to carry over losses or invest heavily in promotional campaigns that may pay off at indeterminate times.
Ultimately, the decision on which entity type is best will depend on your individual tax situation, so consult an attorney before filing to create an entity with your state.
Closely linked to entity structure are decisions on licenses and permits. These will vary depending on the state or states in which you (a) established your business (as an LLC or corporation) and (b) are operating.
In some states, it is legal to operate as a debt buyer without a license and without becoming a debt collection agency. Much more commonly, the state will require you to get licenses and permits prior to beginning any business activity (including setting up a marketing website). Some states (for example, Texas) may not require a license if you operate solely in that state but do require a license if you operate across state lines.
To find out what the licensing requirements are in your state(s), visit the state government website(s). Most have tools available for you to check state requirements.
Ethics are important in debt buying. Depending on your location, you may find that professional and even state and federal regulatory bodies strictly enforce them. Membership in the following organizations is highly regarded when collecting or buying debt or otherwise seeking to do business in this industry (and could get you more business):
The CFPB is a federal government agency that seeks to protect consumers against predatory financial practices. With malpractice in the debt buying and debt collection industries being so prevalent, the CFPB has taken on a particular interest in this area of financial activity.
Anyone wanting to enter the debt buying business should take CFPB reports and recommendations seriously if they wish to avoid the litigative fate of so many buyers and collection agencies in this space (including Encore Capital Group, Midland Funding, Midland Credit Management, and Asset Acceptance Capital Corp., who (in)famously settled a lawsuit started by the CFPB in 2020).
The RMAI (Receivables Management Association International) advocates ethics and professionalism in debt buying and collection and has memberships for those involved in these industries. Memberships entitle individuals and agencies to:
The BBB runs an accreditation scheme for businesses that is well-regarded across industries. Central to the BBB accreditation scheme is trust — precisely what its accredited members are trying to communicate to their business partners and clients/customers.
Being BBB accredited instills a sense of trust and dependability in your business, and in the debt buying industry, that perception is a valuable marker of quality.
On a practical level, when you have secured the required industry memberships and accreditations, you should also ensure that the tools you use to run your business comply with data security and privacy laws and expectations.
In debt buying, you have access to a wide variety of borrower data points, from names and addresses to SSNs and bank details. The hardware and software your business uses must be secure and compliant with all legal and industry standards. This is a complex task that will require deeper research depending on the debt you are buying. Ask an attorney if you are not 100% sure about what protections you need to put in place for data security and privacy as a debt buyer.
A final step in becoming a debt buyer is learning how to conduct extensive and detailed due diligence for every debt purchase in which you are interested. Investopedia defines due diligence as:
… an investigation, audit, or review performed to confirm facts or details of a matter under consideration.
Due diligence is critical in the debt buying realm. As a debt buyer, you have very few protections in place to protect your investments, meaning you are the sole person responsible for verifying the details and legitimacy of a debt purchase.
Scrutinize any company you wish to buy debt from and consider unbiased reviews where available. Avoid companies that are pushy on particular portfolios; they’re just trying to offload unrecoverable debts on you. Similarly, avoid companies paying for ads on Google and social media relating to keywords such as ‘first-time debt buyers’ and ‘profitable debt portfolios’.
If you are an established debt buyer and are looking to buy a deal, consider the Debexpert marketplace. We have made data protection a priority and have safeguards in place for transparency throughout the process. With our platform, you can connect with debt sellers in the US and find deals that will work for you.