Sarah Edwards | May 26, 2023
Edited by Hannah Locklear
Summary: Have you ever wondered how collection agencies obtain consumer debt? On average, debt collection agencies only pay 4% of the original debt value, while they collect on the full amount. This means debt buyers can make a huge profit if you pay them your full debt. SoloSuit explains how debt collection agencies profit from buying up cheap, overdue consumer debts.
When you stop paying a credit card company or another creditor, like a utilities or telecommunications provider, it will try to get you back on track with your payments. If you don’t respond to these efforts, your creditor will likely charge off your account.
A charge-off will wreck your credit score, and a charged-off account will likely end up in the hands of a collection agency.
Creditors often sell charged-off debts to collection agencies, especially when they think it's unlikely that the consumer will repay the entire debt. Once the collection agency buys the debt, it will resume collection efforts against the consumer, which may include a debt lawsuit.
If you’ve been sued for debt, debt settlement can help you save money and avoid going to court. SoloSettle makes the debt settlement process easier.
Generally, collection agencies specialize in certain types of consumer debts. For instance, a collection agency might purchase only credit card or medical debts. Some agencies specialize in unpaid utility and telecommunications bills.
In some cases, the consumer’s location and the age of debt play a role, especially if the collection agency only holds licensure in certain states.
Many collection agencies form relationships with specific creditors. The creditor notifies the collection agency of its available charged-off debts, and the collection agency will review the list to determine the ones it wants to purchase. Sometimes, creditors will sell debts in large groups.
Typically, a collection agency pays far less to acquire a debt than its actual value. In most instances, the agency may pay as little as $0.04 for every $1 in consumer debt. In other words, debt buyers only pay 4% of the original debt value on average, then they collect on the full amount. The low price allows collection agencies to turn a profit, as not all consumers will respond to collection notices, and some debts may be uncollectible.
Let’s consider an example.
Example: Bold Credit charged off 1,000 customer accounts this quarter for clients who stopped paying their bills for six months or longer. The total value of the outstanding consumer debt is $3,000,000, and all of these customers live in California and Nevada. SoCal Collections, which is licensed as a debt collector in both states and specializes in credit card obligations, wants to purchase the charged-off debts. It offers Bold Credit $120,000, or 4% of the outstanding value of the accounts, in a purchase deal. Bold Credit doesn’t receive any other offers, so it agrees to sell the accounts to SoCal Collections.
Once a collection agency purchases charged-off debt from a creditor, it will assess each obligation and start the collection process. Following an initial communication, which can happen via a phone call, email, or letter, the collection agency must provide a written statement of the amount you owe and the original creditor’s name.
The Fair Debt Collection Practices Act (FDCPA) gives you 30 days to dispute the validity of a debt. If you don’t file a dispute during that time, the collection agency can assume the debt is valid and report your account to the credit bureaus.
It’s common to receive multiple phone calls and letters from the collection agency that purchased your old obligation. If you don’t respond to these communications, the collection agency may decide to sue you.
A successful debt lawsuit provides the collection agency with a judgment against you, which it can use to garnish your wages or seize your bank account. Wage garnishment can significantly reduce your income. Some states allow judgment holders to garnish up to 25% of a worker’s weekly wages.
It’s in your best interests to avoid a judgment, especially if you’re already on a strict budget. Wage garnishment can make it much more challenging to afford other things you need, like a place to live and food to eat.
While collection agencies usually don’t pay much to purchase your charged-off debt, they’ll still try to collect the entire amount due from you. You should attempt to make a payment arrangement with them or repay the balance if you have the money available. Otherwise, the collection agency may sue you — something you absolutely don’t want.
Is a collection agency suing you for debt? Don’t let them win — settle your debt with SoloSettle’s help.
If you’ve been sued for debt, you may want to settle the debt before going to court.
When you contact the entity suing you, let them know you are willing to work out a payment arrangement to avoid going to court. Frequently, debt collectors prefer to work out their claims with debtors instead of proceeding with a court case.
Going to court requires collectors to take time away from their regular duties to meet with a judge. The outcome of a court case isn’t guaranteed; they may show up only to find that a judge dismisses their case or issues a finding on your behalf.
On top of that, many debt collectors are debt buyers who purchased your debt for as little as 4% of its original amount. This means that, if you offer to pay off even just 50% of the debt amount, the collector will still make a huge profit. Therefore, debt collectors are usually willing to settle for less.
Before offering to settle the debt, make sure you have an amount in mind that you can afford to pay. If the creditor accepts your offer, you’ll likely need to pay the amount on the spot.
Suppose that you don’t have the financial means to make a lump-sum payment. Try to negotiate a payment plan. Sometimes creditors and debt collectors will agree to a payment plan rather than going to court for a judgment, especially if they believe collecting money from you all at once will be difficult.
SoloSettle makes the debt settlement process simple. Our software helps you send and receive settlement offers until you reach an agreement with your creditor or debt collector. Check out the following video to learn more:
SoloSuit makes it easy to fight debt collectors.
You can use SoloSuit to respond to a debt lawsuit, to send letters to collectors, and even to settle a debt.
SoloSuit's Answer service is a step-by-step web-app that asks you all the necessary questions to complete your Answer. Upon completion, we'll have an attorney review your document and we'll file it for you.
>>Read the FastCompany article: Debt Lawsuits Are Complicated: This Website Makes Them Simpler To Navigate
>>Read the NPR story on SoloSuit. (We can help you in all 50 states.)
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Out Debt Validation Letter is the best way to respond to a collection letter. Many debt collectors will simply give up after receiving it.
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