How Debt Buying Works

In the 1980s, the savings and loan crisis significantly affected the US economy.  Banks were shutting down at an alarming rate, with the Federal Deposit Insurance Corporation receiving the assets of the banks to compensate for the expenses incurred in repaying the depositors of closed banks.

Image source: debt-ports.com

The assets they obtained were then offered to private and institutional investors willing to buy the properties of the closed banks.  The Resolution Trust Corporation then conducted auctions to allow different organizations to bid blindly – the bidders were not allowed to know, let alone evaluate, the assets beforehand.

This started the debt buying industry, leading to the establishment of many debt buying firms.

When creditors decide to sell off debts, they create portfolios that categorize these debts into fresh debts (accounts that are up to six months old), primary debts (up to 12 months old), and secondary and tertiary debts (up to 18 and 30 months old, respectively).  These sorted debts are subsequently marketed and put up for bidding among sellers.

The buyer of the debt then decides on whether to directly collect from the debtor, hire a debt collection agency, resell a fraction of the debt, or to do a combination of any of these.

Image source: hdwallgraphic.com

Brennan & Clark is a business collections agency, providing customized receivables support solutions to eliminate credit losses for businesses.  For more information about the firm, visit this blog.