Understanding the Debt Buying Industry and Collection Practices
When you fall behind on payments for credit cards, medical bills, or other debts – your creditors will eventually give up on collecting from you directly. At that point, they may sell your unpaid debt to a third-party debt buyer or collection agency. These companies then attempt to collect the full balance you owe, often through aggressive tactics.But how much do debt collectors actually pay to acquire your delinquent debt? The amount is usually just a fraction of what you originally owed. By understanding the debt buying process and collection agency pricing models, you can negotiate better settlements and protect your rights.
The Debt Buying Ecosystem
Primary and Secondary Debt Markets
There are two main markets where debts are bought and sold:
-- The primary market involves original creditors selling debts directly to debt buyers soon after charging them off as uncollectible. Creditors sell at a steep discount, often just a few cents on the dollar.
- The secondary market is where debt buyers resell debts they couldn’t collect on to other debt buyers, usually at an even steeper discount.
Major debt buyers like Encore Capital, PRA Group, and Portfolio Recovery Associates operate in both primary and secondary markets.
Debt Pricing Factors
The price a debt buyer pays depends on factors like:
- Age of debt (older debts are cheaper)
- Type of debt (e.g. credit cards, medical, utility bills)
- Amount owed
- Location of debtor
- Documentation/records included
For example, a recent debt pricing report showed that for fresh credit card debt, buyers paid around 7-9 cents per dollar of debt. But for debt over 6 years old, they paid just 1-2 cents on the dollar.
Debt Buyers vs. Collection Agencies
While debt buyers purchase debts outright to collect themselves or resell, collection agencies get hired by creditors or debt buyers to collect on a contingency basis. Their compensation is a percentage of whatever they recover, typically 25-50%.Some major third-party collection agencies include Allied Interstate, FMS Inc, and GC Services.
-How the Collection Process Works
Once a debt buyer acquires your debt, they or the collection agency they hire will start attempting to collect the full amount you owe through letters, phone calls, emails, and even litigation.Under the Fair Debt Collection Practices Act (FDCPA), debt collectors must send you a written “validation notice” with details like the creditor’s name, amount owed, and your rights to dispute the debt within 30 days.If you don’t dispute, the collector can then report the debt to credit bureaus and take other actions to collect, like garnishing wages if they sue and get a court judgment.Debt collectors are notorious for using abusive tactics like harassment, threats, and deceit – which violates the FDCPA. But many people end up paying or settling simply to make it stop.
Typical Debt Sale Pricing
So how little are debt buyers typically paying for your unpaid debts? Here are some eye-opening statistics:
- A 2009 study by the FTC found that debt buyers paid just 4.5 cents per dollar of debt on average.
- A more recent analysis estimated debt buyers pay just 8 cents per dollar for fresh debt, and as little as 4 cents for older debt.
- On Reddit, one commenter claimed debt collectors typically pay 25-40% of face value for fresh debt, but only pennies on the dollar for older debt.
- Another Redditor said their collections agency paid 30% of balances recovered.
So in many cases, debt buyers are acquiring your debt for just a tiny fraction of the original balance – then trying to collect the full amount from you through aggressive tactics.
Contingency Fee Pricing Models
While debt buyers pay a one-time price to purchase debts, third-party collection agencies work on a contingency fee model where they get paid a percentage of whatever they recover.The typical contingency fee ranges from 25% to 50% of collected balances. The rate depends on factors like:
- Age of debt (older = higher fee)
- Balance size (higher fee for lower balances)
- Type of debt (e.g. medical debts may have lower fees)
- Difficulty of collection
For example, one source explains that flat fees around $15-25 per account are common for newer, smaller debts under $10,000. But for older, larger, or harder-to-collect debts, contingency rates up to 50% are more typical.Another article notes that while a 15% contingency fee may be charged for easy-to-collect accounts, rates closer to 50% apply for very difficult collections.So in short – the older and harder your debt is to collect, the higher percentage fee the agency will charge if they do recover anything.
-Negotiating Debt Settlements
Knowing that debt buyers paid just pennies on the dollar for your debt – and collection agencies take a hefty cut of recoveries – can give you leverage to negotiate much lower settlements.The age-old advice is to start settlement negotiations around 25% of your outstanding balance. From there, you can go back-and-forth. But don’t be afraid to start lower, like 10-15% for very old debts, especially if you’re struggling financially.On the r/personalfinance subreddit, many people share stories of settling debts for just 10-25% of the balance by firmly negotiating. As one commenter put it:“I had $10k in debt and settled for $2k. They bought it for pennies so they still made a profit.”When negotiating, get any settlement agreement in writing before paying a lump sum. Insist that it specifies the debt will be reported as “paid in full” or “settled” on your credit reports.You can also try negotiating to have the entire account deleted from your credit reports in exchange for payment – though debt collectors are less likely to agree to this.
Knowing Your Rights
While negotiating settlements is smart, it’s also crucial to understand your rights when dealing with debt collectors under the FDCPA:
- Debt collectors cannot harass you with repeated calls or abusive language
- They cannot lie about the amount you owe or their identity as a debt collector
- They cannot threaten you with arrest or other illegal actions
- They must honor written requests to stop contacting you
If a debt collector violates these or other FDCPA rules, you can file a complaint with the FTC and potentially sue them in federal court to recover damages.You can find more details on your rights in this FTC publication on debt collection.
-The Bigger Picture
While negotiating debt settlements makes sense given the low prices debt buyers pay, it’s important to look at the bigger ethical questions around this industry:
- Is it right for original creditors to sell off debts for pennies, allowing unscrupulous debt buyers to then use abusive tactics?
- Do the debt buying and collections industries create misaligned incentives that prioritize profits over helping consumers?
- Should there be more regulation around debt buying pricing, documentation requirements, and collection practices?
These are complex issues, but it’s clear the current system has major flaws that can harm vulnerable consumers struggling with debt.As one Quora commenter put it:“The debt buying industry is a legalized way to exploit people’s misfortunes for profit. Regulation is needed to protect consumers from abusive practices.”So while understanding pricing dynamics can help you negotiate settlements, pushing for larger reforms may ultimately be needed.
The Bottom Line
Debt buyers are acquiring your unpaid debts at extremely low prices, often just pennies on the dollar. And collection agencies take a 25-50% cut of whatever they recover from you.This means that by firmly negotiating lump-sum settlements, you can often settle for just a fraction of your original balance while the debt buyer still profits.But it also raises bigger ethical questions around an industry that creates misaligned incentives to exploit consumers through aggressive tactics – rather than helping them recover responsibly.