All lenders sooner or later face the fact that some accounts become charged off. There are traditional ways to solve this problem, such as internal collection efforts, interviewing debt collection agencies, or going the legal route. A more modern way is to sell the debt to a debt buyer. Each method has its advantages, so depending on the type of debt, its size, and accounts delinquency, one of these methods will be most suitable.
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.
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.
Any debt confirmed by a contract or any other document showing the obligation to return or pay a predetermined amount within some time is eligible for sale. Also, the seller has a marketable title for the loans. If your debt falls within these criteria, your debt portfolios can legally be sold.
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:
The most frequently traded secured debts are:
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.
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.
The most common issue when selling a debt portfolio is the liability of the seller and his risk for the actions of the buyer of the debt portfolio. This is not a concern for the seller if three criteria are met:
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.
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:
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:
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.
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.
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.
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 is the preparation of the Purchase Sales Agreement. The contract should reflect the actual terms for closing the transaction, transferring documents, and obligations of the seller and buyer.
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.
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 your data 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.