Table of contents
Debt buyers (DBs) purchase bad debts from the original creditor for a percentage of the full debt’s face value at a discounted price. They are either part of debt collection agencies or part of private debt recovery organisations or law firms, and are directly bound up with the debt collection process. After the purchase of the default amounts, debt purchasers become creditors and possess the legal right to collect the debts by themselves on behalf of their own company. DBs focus primarily on unsecured bad debts, such as credit card debts, goods/services debts, charge accounts, unpaid membership fees, medical debts, automobile loans, unpaid bills, etc. The age of debt defines the price of delinquent amount: it differs depending on whether the overdue payments are fresh (less than 6 months old), new (less than 3 years old) or older (between 6-15 years old).
Governance of debt buyers
Canada regulates debt collection agencies and debt purchasers by using the Office of Consumer Affairs (OCA, ext. link 4), the Collection Agencies Act (ext. link 5) the Financial Administration Act (ext. link 6), the Consumer Protection Regulation (ext. link 7); and many others, according to Canada’s state of action.
In US the act that regulates the debt collection is the FDCPA (Fair Debt Collection Practices Act) but some debt purchasers have tried to argue this point. The reason of the claim is the fact that the FDCPA regulates only consumer debt collector’s activities. According to this US act creditors are NOT considered as debt collectors. They can collect debts using their internal departments and subdivisions, but they cannot charge their debtors an additional commission fee, as they are not licensed debt recovery agents. Debt buyers fall under the definition of a “collection agency” but when they become owners of a bad debt, in actual fact they are no longer recovery agents, but creditors. Nevertheless, US debt buyers have to comply with the FDCPA’s regulations; the FTC Act (Federal Trade Commission Act), ext. link 8; and also with the Fair Credit Reporting Act (FCRA), ext. link 9.
In UK debt purchasers comply with the Office of Fair Trading and the Fair Trading Act (ext. link 10), etc.
Debt buyers- purchase process and proceedings
Debt buyers purchase three types of debts: up to 6 months old (the so-called “fresh” accounts), up to 12 months old, up to 3 years old, and older than 3 years. They do not always buy debts attempted to be collected by the original creditor. Sometimes the original lender sells even the debts, which he hasn’t attempted to collect at all.
When the original creditor has prepared debtor’s portfolios, they enter the market and purchasers of debts can start the bidding, which is the first part of the debt purchase process. Thorough information should be included in such portfolios for a better profile price. The amount the creditor will request for a debtor’s profile depends on the amount of information available.
After purchasing default profiles from the original lender, debt buyers become the new creditors and owners of the bad debts. They are obliged to inform the debtor that the bad debt has been purchased and point the new creditor’s name. Then debt purchasers can either recover the delinquent amounts on their own, hire a third-party DCA (Debt Collection Agency) to act on their behalf during the collection process, or resell the same debtors’ profiles to smaller debt buyers’ companies. If they succeed in the collection process, no matter what method they will use, this will lead to increase of the cash flow and profit for debt buyers’ company.
If purchasers of debts decide to try collecting the debts on behalf of their own organisation, then they are considered as creditors and cannot request a commission fee from the debtor, unless they act under a different company name, which has to be licensed as a legal DCA. They still have the right to use different pre-legal and legal proceedings and various types of communication methods (phone calls, emails, letters, etc.). They are authorised to hire enforcement agents or bailiffs, if needed, in order to force debt settlement. The official letters of demand have the same structure, as the letters a standard DCA sends. If necessary, they can use debt collection solicitors, or even transfer the case to court.
If debt purchasers hire a recovery agency as a third-party, the whole collection process is to be transferred to the debt collection agency along with debtors’ profiles.
There is an option, where debt buyers are also a debt collection agency. In this case they can collect amounts on behalf of a creditor that hired them (in the role of a DCA), and they can buy debts (in the role of debt buyers) and recover for themselves as well. In the second case debt buyers have the right to demand interest rate from the debtor only, if they have another registered name, as commission fee collection is forbidden to be performed by, and on behalf the same company that owns the debt.
Used literature & external links