What is debt buying? 

Before we dive into the numbers, let’s clarify what we’re talking about. Debt buying is when a company purchases delinquent or charged-off debts from creditors for a fraction of the debt’s face value. They then attempt to collect on these debts, hoping to make a profit. 

The process, in a nutshell:  

• Creditors bundle together similar types of debt into portfolios. 

• These portfolios are then offered for sale, often through a bidding process. 

• Debt buyers analyze the portfolios and make offers based on their assessment of collectability. 

• Once purchased, the debt buyer now owns the debt and has the right to collect on it. 

So, how much do they pay? 

Now, for the million-dollar question (or more accurately, the pennies-on-the-dollar question): How much do debt collectors actually pay for these debts? The short answer is: It varies, but it’s usually much less than you might think. 

On average, debt buyers pay pennies on the dollar for old debt. Yes, you read that right – mere pennies for each dollar of debt. However, this is an average, and the actual amount can vary widely based on several factors: 

• Age of the debt: The older the debt, the less it typically costs. Fresh debts (less than 6 months old) might sell for 7-15 cents on the dollar, while debts that are several years old might go for less than a penny on the dollar. 

• Type of debt: Different types of debt command different prices: 

• • Credit card debt often sells for 4-7 cents on the dollar. 

• • Medical debt might go for 1-5 cents on the dollar. 

• • Mortgage deficiencies can sell for 2-5 cents on the dollar. 

• Previous collection attempts: If the debt has already been through multiple collection attempts, its value decreases. 

• Documentation: Debts with complete documentation (proof of the original agreement, payment history, etc.) are worth more than those with incomplete records. 

• State laws: Some states have more debtor-friendly laws, which can decrease the value of debt in those states. 

• Economic conditions: During economic downturns, debt prices often decrease as collectors anticipate it will be harder to recover money from struggling consumers. 

Real-world examples 

To put this into perspective, let’s look at some real-world examples: 

• In 2013, the FTC reported that debt buyers paid an average of 4 cents per dollar of debt face value. 

• A portfolio of credit card debt with a face value of $1 million might sell for $40,000 to $70,000. 

• Older, less collectible debt might sell for as little as $10 per account, regardless of the balance. 

Why so cheap? 

You might be wondering why creditors are willing to sell debt for such a low price. There are several reasons: 

• Recovery rates: Debt buyers typically only expect to collect on a small percentage of the debts they buy. Many debts will never be collected. 

• Time value of money: For the original creditor, getting some money now is often preferable to the uncertainty of collecting the full amount later. 

• Resource allocation: Creditors prefer to focus their resources on current customers rather than chasing old debts. 

• Tax benefits: In some cases, writing off bad debt can provide tax benefits to the original creditor. 

The profitability question 

Given these low purchase prices, you might be wondering how debt buyers make money. The key is volume and efficient collection practices. If a debt buyer purchases a $1 million portfolio for $50,000, they only need to collect a small fraction of the total debt to turn a profit. 

Ethical considerations 

It’s worth noting that the debt buying industry has faced criticism and increased regulation in recent years. Issues include: 

• Attempts to collect on time-barred debts (debts too old to legally collect). 

• Insufficient documentation leading to collection attempts on already paid debts. 

• Aggressive or illegal collection tactics. 

• As a result, regulations like the Fair Debt Collection Practices Act (FDCPA) have been put in place to protect consumers. 

What this means for you 

Understanding how little debt buyers pay for debt can be empowering for consumers: 

• Negotiation power: Knowing that the collector likely paid very little for your debt can give you leverage in negotiating a settlement. 

• Perspective on collection calls: Aggressive collection tactics might seem less intimidating when you understand the economics behind them. 

• Motivation to address debts early: The low sale price of old debts underscores the importance of addressing financial issues early, when you have more control over the situation.