Junk Debt Buyers, also known as Debt Acquisition companies, buy debt by the bulk in large portfolios.  Often, original creditors are selling debts that were absolved due to bankruptcy or debt settlement.  And collection agencies also sell debts in bulk to other collecting companies.  Why would anyone buy debt that legally can’t be collected on?  Because many people pay up!

Why would anyone pay on a debt that they don’t legally owe?

There are some laws, that should be on the books that aren’t (I cannot believe I just said that), and therefore creditors are able to use leverage to force consumers to pay such debts.  For example, the law does not clearly require creditors to report to the credit reporting bureaus that debts are no longer valid as the result of bankruptcy or debt settlement.  Creditors are using loopholes in the law to still ding your credit report with a debt that has been legally absolved.  They often claim they never received the proper ‘paperwork’ that would have obliged them to report the debt accurately. As a result, many people who still want to use credit (idiots) will pay off the old debt to clear up their credit report.  They do this, because having not learned from the perils of credit already, are actively seeking to make additional purchases using credit.  Bankruptcy law prohibits efforts to collect on discharged debt.  These collections take place below the radar screen despite being a huge industry.

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DebtConnection.com posted on June 20 an offer to sell a batch of Chapter 7 bankruptcy accounts with a face value of $200 million. The sale was on behalf of Collect America, one of the nation’s largest debt buyers and collectors.

In some instances these companies use their ability to ding your credit report, which artificially lowers your credit score and history, to persuade you into paying.  Therefore if you are trying to buy a house on credit after recently having filed bankruptcy (idiot), you may pay the old debt in your haste to acquire the home, and thus acquire more debt.

Also, many people simply have no knowledge of the Statute of Limitations on debt and will pay a debt past the SOL because they believe the collection agency can take them to court, acquire a judgment, and garnish their wages.  These collectors cannot take you to court, and even if they did, presenting the court with proof that the debt has been legally absolved would be the end of the matter.  So why do people pay on these debts?  They pay because they need a clean credit history (idiots) or because they simply don’t know their rights (the uninformed consumer).

How junk debt purchases work

Here is how the process works. Let’s say that Chase Bank has 40,000 Visa cards that were defaulted on by the consumer. They were unable to collect with in house collections and charged off the debt. The average balance of each card is about $2,000.  Chase Bank needs to get some money, any money, for this batch of defaulted debt. The collection process can be expensive and require legal action.  Rather than build an empire of collectors and lawyers and have to deal with all sorts of crap – they package and sell the debts. 

They gather these accounts into a portfolio and put it on the market to the highest bidder. Let’s say that bidding starts out at 5 cents on the dollar. The junk debt firms have limited info to work with on the portfolios they have. It’s kind of like a storage unit auction. You know there are household goods and clothes, but until you bid and win, you won’t know exactly what you got. The junk debt firms are told the number of accounts, the average balance, the average charge off date, and how many have phone numbers. The junk debt firms have to decide if they are going to lose money on the package - or if it is collectable and profitable. Skip forward… Junk Debt Company A wins the bid at 8 cents on the dollar and now gets the portfolio. The manager of Chase Bank signs a bill of sale and Junk Debt Company A is now the owner of the debt, and has all rights that Chase Bank once had.  They now possess the same rights as the original creditor, with the exception that, since they aren’t the original creditor (Chase Bank is), the collection firm is subject to the Fair Debt Collection Practices Act.

Inside a Junk Debt Firm

From debtconsolidationcare.com

How in the world are these junk debt companies coming up with all of this money? Investors. They peddle themselves around and get people to invest in the company. I’m going to digress a quick second to collector behavior. I am not condoning illegal or bad practices on a collector’s behalf, but I would like you to see what kind of conditions collectors work under. Let’s stick with the theme of “It rolls downhill.” OK, so Mr. Investor wants a return. He is going to be mad if he loses money, and won’t be back next year. Junk-debt CEOS don’t like that. They set up aggressive portfolio tracking, goal setting, quotas, financial planning, etc. This gets passed down to the senior managers and directors, who now have to produce results from their subordinates. Senior managers pound team-leaders into the ground with hours of training, and force them to work 50 hour weeks to make sure their teams all hit quota.

The team leader has to answer to the senior managers if his team, as a whole or each individual, doesn’t hit their personal goal. Personal goals add to up team quota and that equals the floor goal. The team leader is on each of their collectors to get the money. The collectors often work over 40 hours, and normally have their calls monitored and recorded by management. They have QA forms they have to meet 100% on. They have training on FDCPA. They constantly have this quota looming over them. Quite usually, it is very high. Collectors, by and large, do not live by salary alone, so they depend on their bonus checks. So, starting from the beginning of the month, all they see is the end of the month, and how many dollars away from their goal they are. If the collector is not at quota… you will hear it in their voice.

Junk-debt buyers are aggressive. They want their money. Their investors want returns. IF THEY CAN SUE YOU, THEY WILL. Normally, there is a legal department working within the agency. They are given a percentage of the accounts to work, just as the other collectors are. It’s the luck of the draw. If the account is suit worthy, and the legal department has it, they will attempt to sue you. I know this isn’t going to be popular, but I am going to state the facts as they are. If you call attention to yourself, and the account is in-stat, you are risking being sued. What do you mean? I mean that if you file a debt validation claim, cease & desist, refusal to pay, etc…you have just called attention to yourself. These accounts are given to a special department. Yes, they will usually try to collect from you. It costs money to sue, but if all else fails…they will attempt to sue you. (I want to note that if you ever have any question about a debt, do not let them scare you out of your rights. You have a right to know what the debt is, who the company is, and you certainly have the right to not be contacted at work.)

Think it can’t happen to you

I have personally been contacted by many readers whose debts are far beyond the Statute of Limitations – only to have collection agencies calling their home daily.

The case of John Pfister provides one illustration. Pfister, 63, a retired AT&T technical supervisor in Denton, Tex., received a Chapter 7 discharge in 2001. Then, last January, while applying for a mortgage, he learned that two discharged credit-card debts, a Discover Card balance of $6,306 and a former Chase account for $2,683, were showing up on his credit reports. Lenders turned him away because of what appeared to be unpaid obligations, he says.

The FTC has sued several collection agencies over their practices. In 2004, NCO Group – a major buyer of old debt — agreed to pay a then-record $1.5 million civil fine after the FTC accused it of reporting inaccurate information to credit bureaus. In 2005, the FTC won a $10.2 million judgment against National Check Control for, among other violations, threatening consumers with lawsuits and jail for purported debts. In many cases, the consumer didn’t owe the debt, or the amount had been vastly inflated.

Protect your family — let a bankruptcy lawyer help you explore whether Chapter 7 bankruptcy or Chapter 13 bankruptcy will offer you the most financial clarity. The first step to financial renewal is completing this free evaluation form.

Related Articles

* Restrictions on Wage Garnishment for Debt Collection.

* The Fair Debt Collection Practices Act

* Reasons not to file Bankruptcy or Settle Your Debts

* Can you go to jail for not paying your debts?

* How to settle your debts on your own

* How to deal with collection agencies

* Sample Debt Validation Letter