Debt Buying and Debt Collection: How It Works

From charge-off to sale

A charge-off is an accounting entry. The creditor writes the account off as a loss, but the charge-off does not cancel the debt. The creditor can still collect it, or it can sell it.

Creditors often sell charged-off accounts in large portfolios. Some sell them in one-time sales, while others sell them every month under a forward flow agreement. A portfolio can be resold several times before anyone contacts the consumer.

What debt buyers pay and what they receive

In 2013 the Federal Trade Commission published a study of the debt buying industry. It reviewed more than 5,000 portfolios with nearly 90 million accounts. The FTC reported that buyers paid an average of about 4 cents per dollar of face value, and that older debt sold for less.

The FTC also found that buyers usually received account data rather than documents. That data included the consumer’s name and address, the account number, the balance and key dates. Buyers often did not receive information about earlier disputes, and most sale contracts disclaimed any promise that the data was accurate.

Who is a “debt collector”

The Fair Debt Collection Practices Act (FDCPA) applies to “debt collectors” as 15 U.S.C. § 1692a(6) defines them. That includes companies whose principal purpose is collecting debts and companies that regularly collect debts owed to someone else. In Henson v. Santander Consumer USA Inc., 582 U.S. 79 (2017), the Supreme Court held that a company that buys debts and collects them for itself is not covered by the “owed to another” part of the definition. The Court did not decide whether such a company falls under the “principal purpose” part. As a result, whether a particular debt buyer is covered can depend on how it operates.

Why ownership matters

A consumer owes payment to the party that owns the debt or is authorized to collect it. So when a company the consumer never dealt with demands payment, it is reasonable to ask how that company got the account. Our guide to proving debt ownership explains the documents that normally show each transfer.

Where to go next

• Debt validation under the FDCPA
• Proving ownership of a purchased debt
• Defending a debt collection lawsuit
• Disputing collection accounts on your credit report
• Time-barred debt and the statute of limitations

Debt collection is governed by federal law and state law. State statutes of limitations, licensing rules and court procedures differ, so check your state’s rules and talk to a licensed attorney about an active case.

Researching debt buying and debt collection: how it works in your state

First, find the statute or rule that governs debt buying and debt collection: how it works where you live. State law controls most of these questions, so the answer can change from one state to the next. Next, read recent decisions from the appellate courts in your state. They show how judges apply the law today. Also, check the local rules of the court that would hear your case. Our state procedures guide links to each state’s official rules. In addition, the Research Center explains how to confirm a source is still good law.

Sources and further reading

Official sources used on this page:

• law.cornell.edu
• supreme.justia.com
• ftc.gov

Related reading on Lawtopolis:

• Debt Validation Under the FDCPA (15 U.S.C. § 1692g)
• Proving Ownership of a Purchased Debt: Chain of Title
• Forward Flow Agreements
• Receivables and the Sale of Accounts (UCC Article 9)