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How to Sell Debt to a Debt Buyer?

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Key takeaways:
To sell debt to a debt buyer, first compile and verify all relevant documentation regarding the outstanding debt, then identify and approach reputable debt purchasing firms to solicit offers. Ensure you understand the terms of the sale, and finalize the agreement through a legally binding contract, seeking legal advice as necessary.

All lenders sooner or later face the reality that some accounts become charged off. When dealing with this issue, there are various approaches to consider. Traditional methods include internal collection efforts, engaging with debt collection agencies, or pursuing legal avenues. Alternatively, a more modern approach involves selling the debt to a reputable debt buyer. It is important to note that each method has its advantages, and the most suitable approach depends on factors such as the type of debt, its size, and the delinquency status of the accounts. Regardless of the chosen method, it is essential to adhere to fair debt collection practices to ensure ethical and lawful handling of the debt.

Unlike other methods, selling debt is becoming increasingly popular in the market now. The main reason is that selling more often generates a higher return, especially considering the effect of getting money immediately and originating new loans. It compares better to years of trying to collect the debt, operating costs, and the risks a lender takes by engaging in the collection on its own.

Who Buys Debt?

A debt buyer is a legal entity or individual investor that purchases debt to collect and make a return on the investment. There are different types of debt buyers: passive debt buyers, collection agencies that buy debt, law firms, family offices and funds, and real estate notes investors. 

Let's look at each of these types individually. 

1. Passive Debt Buyers

Professional investors specialize in buying debt. They do not collect bad debts. Once they have purchased the debt, they hire debt collectors and law firms to collect the debt. They specialize in unsecured accounts.

2. Collection agencies

The next type of debt purchaser is a debt collection agency. As a rule, they buy debts from their clients, whose debt portfolios they have already serviced. 

3. Law firms

Those law firms that provide debt litigation services also invest in the purchase of debt. As a rule, such buyers are only interested in debt within the states where this law firm is licensed.

4. Family offices and funds

This type of buyer is similar to passive debt buyers; they engage a debt collection agency to recover accounts. But the scale of their interests, as a rule, goes beyond charged-offs, and they often buy performing debt, both unsecured consumer debt and commercial RE.

What Debt is Eligible for Sale?

Any debt confirmed by a contract, or any other document showing the obligation to pay money arising from a transaction, which mandates the return or payment of a predetermined amount within a certain time frame, is eligible for sale. This includes situations where the seller has a marketable title for the loans. If your debt falls within these criteria, your debt portfolios can legally be sold, allowing you to recoup some of your investment.

Most often on the market are sold non-performing accounts, but performing is sold quite often. For bad debts, a seller must expect a high discount from par value, whereas performing debt is sold close to par. 

Lenders can sell the following types of unsecured and secured accounts, including high-interest debt. The most frequently sold unsecured accounts are as follows: 

  • Installment Loans
  • Payday Loans
  • Credit Cards (Business and personal)
  • Point of Sale
  • Online Loans
  • Personal Loans
  • Student Loans
  • Auto Deficiencies
  • Merchant Cash Advances (MCA)
  • Medical Debt 
  • DDA (Checking Account Overdrafts)
  • Bad Checks (B2B/C2B /NSF/Check Guarantee)
  • Bail Bonds
  • Telecom
  • Utilities

The most frequently traded secured debts are:

  • First Lien Mortgages
  • Bridge Loans
  • Second Lien Mortgages
  • Commercial Real Estate Notes
  • Seller Financed Notes
  • CFD
  • Auto Loans

It may seem strange, but buyers are buying bankruptcies as well. They also buy judgments, business loans, and unpaid invoices because buyers know how to collect these types of debts.

You can sell debt with any past due days, fresh accounts - no collection efforts, overdue less than 90 days, and debt that has been processed through external or internal collection. Even old debt 1, 2, 3, or 4 years delinquent is also sellable. Some states allow the sale of debt, which has passed the statute of limitation. 

Selling Debt: Risks and Benefits

The main reason companies sell debt — is the instant return of money. The older the debt, the harder it is to retrieve money from the borrower. Debt buyers know it — that is why older accounts cost less.

Once the debt is sold, the debt buyer owns the account, and the borrower is now responsible for submitting any payment to the new owner. However, many clients may not be aware that their debt is sold, and establishing communication between debtor and new debt owner takes time. Meanwhile, your organization loses control over this communication. It is crucial to pick your debt purchaser carefully. The disappointed client can spoil your reputation by revealing information about violations committed by the collector.

Clients can take legal action after working with debt collection agencies violating FDCPA rules of communication with consumers.

Thousands of original creditors and non-lenders sell debt regularly because the benefits of the sale far outweigh the risks. Every seller needs to understand these two sides of the coin, so let's look at them individually.

Risks of selling debt

When selling a debt portfolio, the most common concern is the liability of the seller and their risk for the actions of the buyer of the debt portfolio. However, this does not pose a concern for the seller if three criteria are met. These crucial criteria, much like the standards of central portfolio control, help to mitigate risks and ensure a smooth transaction. By adhering to these guidelines, a seller can more confidently navigate the process of selling their debt portfolio.

  1. At the origination of debt, everything was done following state law, and all documents with the debtor were correctly drawn 
  2. At the sale, a legally correct purchase sales agreement is made
  3. All documents were transferred to the debt buyer

If all three criteria are met, the risks of working with debtors will be fully transferred to the buyer.

The second risk to consider is reputational because the third-party debt collectors will work with the borrower, and it must work following state law and FDCPA requirements. To eliminate this risk, it is essential to conduct due diligence on the buyer (please see the article: link ) and work with a platform that only allows verified buyers to buy.

Benefits of Debt Selling

All lenders face the problem of delinquent accounts or the need to securitize an existing loan portfolio. This is why selling debt has become such a popular way of addressing those two issues and also because companies get additional benefits from selling debt: 

  1. Immediate Monetization of debt balances allows lenders to reinvest funds into new lending, thus significantly improving the business's bottom line, unlike working with a debt collector that returns the amount in months or years. 
  2. Collecting and servicing charged-offs especially requires significant operational efforts: the availability of personnel who work with bad debt, the hiring of specialized collection agencies and vendors to search for debtors and collect accounts, incur collection fees and legal expenses and at the end of all, sometimes, be very unsatisfied with the outcome. 
  3. Selling debt allows the company to focus on what it does best: loan origination and client servicing.
  4. Reduce legal risks: by selling debt to a professional buyer, sellers reduce the likelihood of violating collection laws and rules since the company that does just that (debt buyer) is more likely to be able to do this more compliant than anyone else.
  5. Improve business ratios. Companies need to improve the performance of their debt portfolio to raise new capital or borrowing, and selling debt is a great way to do it. 
  6. Get market benchmarks of the value of the NPL portfolio and compare it to collection in house. Thus, determining the need to optimize internal processes.
  7. Identify gaps in the process of issuing loans and scoring debtors.

Who to Sell Debt?

A debt portfolio needs to be sold to professional buyers. How to distinguish an experienced debt buyer: First of all, it must be a legal entity that has a license for debt buying and debt collection, following the state with which they work, the company must have insurance, the company must have internal policies and procedures for data security work and employees. And also, it is desirable to be a member of a professional body regulating buying and collection activity.

Several professional organizations establish standards of ethics and professionalism in the debt buying and collection industry. If the company is listed in one of these, there is a high possibility that you will be dealing with a professional debt buyer:

  • RMAI (Receivables Management Association International), formerly known as the DBA International (Debt Buyers Association)
  • ACA International (The Association of Credit Collection Professionals)

The majority of verified debt purchasers observe all rules and standards. To reduce the risk, you can add a clause forbidding the resale of the debt, but this also reduces its market price. If you are familiar with the buyer, you can also agree upon the resale of debt and let him choose the future strategy on his account. 

To navigate the debt market, we recommend using professional debt trading platforms that maintain high standards of buyers’ due diligence during onboarding and throughout the deal closing. Such platforms give access only to professional buyers and usually have all relevant buyers for your portfolio, thus greatly simplifying the process of selling debt.

What Happens When a Debt is Sold to a Debt Collection Agency?

Debt Collection agencies that buy debt will collect the debt using their resources. This is the difference between this buyer and the passive debt buyer. 

After the documents have been transferred to that debt collection agency, an analysis of the debtors will be carried out, the call center will process some debt, and some debtors will be immediately sent to court to obtain a judgment. Some debt remain uncollected, and those collected must pay back the investments in this portfolio.

Unmarketable or Unsellable Debt Profiles

You cannot sell debt that does not have a clean chain of title, and in some states, you cannot sell debt that is outside the statute of limitations. Regulating the process of selling debt is the responsibility of each state, so we recommend that you seek advice from the debt trading platform to navigate all the requirements.

Usually debt buyers do not buy deceased accounts, bankruptcies, settled accounts and fraud accounts. These accounts need to be excluded from the data tape.

Also we do not recommend selling accounts that have been originated with violation of any state or federal laws.

Unmarketable or unsellable debt profiles are returned or refunded by the seller if mistakably were included into the portfolio. We recommend scrubbing the account prior to the sale.

How to Prepare a Debt Portfolio for Sale?

To prepare a portfolio for sale, you must create a masked file. A masked file is an excel spreadsheet that lists all the accounts that the seller wants to sell, while sensitive information of borrowers is masked. After the masked file is ready, you need to think about the sales strategy: sell the entire portfolio, break it down into pools and geography, product types, and stage of delinquency. As a rule, each buyer specializes in a particular kind of geography or debt, so to ensure the maximum price, it is recommended to break portfolios into pools.

The next step is to check the availability of original documents of loan contracts. If the media is stored electronically, the sale process and the portfolio price will usually be higher because the buyer can start working with the portfolio immediately after signing the PSA. If the documents are stored in hard copies, then you need to ask to prepare media for sale by putting them in separate boxes. 

The third step in the process is the preparation of the Purchase Sales Agreement, which serves as a legally binding contract outlining the terms and conditions of the transaction. This agreement should accurately reflect the details of the commercial credit transaction involving the sale of the debt portfolio, including the transfer of documents and the respective obligations of both the seller and buyer. It is crucial to ensure that the Purchase Sales Agreement is comprehensive and covers all necessary aspects to protect the interests of both parties involved.

The last step is the preparation of the Seller's Questionnaire, in which the seller describes the main parameters of the portfolio to be sold. A correctly completed seller's questionnaire will help buyers better understand the portfolio being sold, how it was previously collected, and other features.

Selling Debt with Debexpert

Debexpert is a fintech company that helps lenders and debt holders sell their delinquent debt, charged-offs, and performing debt portfolios at the highest possible price. Debexpert works with all lenders, from publicly traded financial institutions to private lenders. The most extensive nationwide base of debt buyers exceeds 500 professionals preselected to access a secured trading platform. Thanks to the auctioning method of sale, lenders receive instant monetization of their portfolio as it takes less than 2 hours to get bids. The platform is end-to-end encrypted so that you can be sure of data consumer financial protection. 

The platform is free to join, and no commission is charged from sellers. Please complete the form below, and our manager will get in touch shortly.

How to Sell Debt to a Debt Buyer? | Debexpert
Written by
Henry Arora
Head of Business Development

Experienced Manager with a demonstrated history of working in the Fintech/Customer services/Debt Collections industry. Skilled in Management, Debt Collections Sales, Leadership, Team Management, and Public Speaking. Strong operations professional graduated from Madhurai Kamraj University.

  • Fintech/Customer services Expert
  • Public Speaking
  • Debt collection Expert



Who buys debt?

Usually debt is bought by investors that specialize in buying debt portfolios. Law offices, family offices or collection agencies might be buying debt portfolios as well.‍

What debt are we selling

We specialize in car, real estate, consumer and credit cards loans. We can sell any kind of debt.

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