The term “debt collection” dates back to the middle ages, when merchants and bankers would pay courtiers to collect debts owed by their customers.
The debt collection industry is a large, rapidly growing industry in the United States, and is one of the fastest growing industries in the country.
This is a short (10 minute) introduction to this topic. It is meant to help people get into debt collecting, get started with it, or brush up on what they learned elsewhere. I will also be doing a follow-up post once a few weeks on topics I want to discuss further.
I also want to note that this is not financial advice! I am aware of many people who have lost money doing debt collection for their clients (or worse), and I know there are many more that have made more than enough money from it that they don’t care about whether anyone else loses money doing it for them. It’s just a fact of life in this business that if you’re not careful about your clients, you will lose money for them!
What is debt?
The term “debt” is used synonymously with “money owed.” As a result of this confusion, many people assume that one has to pay off debt. Not so. You can buy debt for pennies on the dollar without paying anything up front.
When you buy debt, you are not buying a specific amount of money, but rather the right to get it back at a later date. The parties involved in a transaction — you and the creditor — have agreed to transfer ownership of your assets for a short period so that they can go into receivership if the property needed for repayment is in use by somebody else. After that time is up, your assets revert back to the original owner — whoever you were before you bought them.
You might be thinking: “That sounds great! But I need somebody who can control my assets for me in order to make this work!” Actually, no, because debt buyers don’t have access to your assets at all… They merely own them temporarily (for their own financial benefit) so that they can “get out” if they decide things aren’t going well (and they won’t want those assets).
So what exactly are these debts? Well firstly they aren’t debts at all; they are types of credit: loans or lines of credit which give borrowers an ability to pay during good times and when times are bad (like now). For example:
• A mortgage loan which provides a borrower with an opportunity to make payments on their home instead of renting it out
• A line of credit which gives borrowers an opportunity to take out cash against future income in order to pay down their debt
Debt buyers don’t usually like mortgages because mortgage debt is typically non-recourse whereas car loans and other kinds of unsecured loans are generally recourse . The reason is because it’s more expensive for the lender if there’s an unexpected event like bankruptcy or some other type of lawsuit against the borrower than if there isn’t one (especially since lenders have typically pledged most or all their collateral as collateral in such cases). So it makes sense for banks and other lenders to put up less than 100% financing against such loans. But then again, few people actually prefer being personally liable for such things anyway; most people want only absolute avoidance of any personal liability while they’ve got their hands on their home or car or boat… So why would anyone want someone else making those kinds of decisions about them
Who sells debt?
A lot of people are unaware of the fact that there is a market for debt collection agencies. The reason why is simple: there isn’t any regulation. It’s basically a black-market operation. There are none of the strict rules like in other industries, such as insurance, where there is a lot more regulation around who you can and can’t collect on.
The people who sell debt collection agencies do it because they know they can make a buck off of it — not because they’re altruistic or want to help out people who are in financial distress. This isn’t an industry in which you want to do business on behalf of your customers, even if you might be able to earn a dollar or two on it. It’s an industry where anyone who has money to make can buy debt collection agencies with and then sell their services against the debtor’s assets. The business works like this:
First, find out what assets someone owes (either by court order or by being sued). When you know what assets someone owes and can reasonably estimate how much money he or she really has available for payment, you can try to get them to pay up with some kind of promise that if they don’t pay up within five days you will turn over all their personal belonging (or at least any that could easily be sold at a profit). If the debtor doesn’t pay up within five days, then your “dealing” person gets paid by either getting the debtor’s assets transferred as collateral against his future payments or collecting whatever portion of the debt owed from him personally. In either case, everyone involved makes lots of money from this type of business: both the seller and buyer get paid by their respective creditors for making sure that someone else gets paid for his debts.
The seller is usually willing to accept any reasonable payment offer from someone else — especially if he thinks that he might get paid more than his existing creditors would be willing to accept for his debts. He also won’t ask for anything more than what he thinks he could earn from it. The buyer is usually looking for something like 90%+ – 100% – 110% – 120% – 130% – 140%. Anything less is probably going to be too low and too risky; anything higher doesn’t make sense financially unless it clearly makes sense when compared with other things one can do in one’s free time (which is rare). Some businesses like this sort of thing because they don’t invest much capital but it’s not profitable but rather
How much do they sell it for?
The practice of making money on debt collection is rampant. The average car loan is $2,972 and the average payday loan is $1,865. Many people make money off debt collection agencies by selling credit card debt to these organizations. The reality is that this practice isn’t legal and it’s illegal for any two parties to collect debts for each other.
It’s just a matter of probability and common sense. People who want to make money off the collection industry often fail in their attempts at achieving this goal because they don’t understand how the industry works or why some companies do so well while others don’t. So here are some basic rules that can help you avoid getting ripped off:
1.) Do not get sucked into a long-term lease on a car or a house that has no cash value (for example, I know people who have leased cars that are worth nothing and have been paying rent on them for years).
2.) Never sign a contract where one party agrees to pay the other party money in exchange for future services such as collections, medical bills or tuition payments (that’s just not legal — even if all parties are happy with it).
3.) If you’re concerned about your credit score, take your time looking into credit repair and credit monitoring programs before signing anything with an agency like CreditorAdvisor.com or CreditorAdvisorOnline.com. These companies will do an analysis of your credit report and provide recommendations based on that information. The prices vary according to your score but many top-rated companies offer it for free unless you qualify for one of their premium packages (which typically cost anywhere from $10-$45 depending on your score). Personally, I’ve found CreditorAdvisorOnline to be very competent in their recommendations and services (including excellent credit reports), but they do charge fees if you decide to pay more than 30% of the total cost upfront (which I’ve found not to be necessary). At least CreditorAdvisorOnline doesn’t require me to pay up front because they can show me what my score will look like when I finally get paid back my student loans (I’m waiting for my first payment which should be coming soon) since I’m paying monthly rather than annually as most student loan companies expect me t
How do you buy debt?
Do you know how much money you will have to borrow? Will it be enough to fix your credit and make you debt free? If so, how do you buy a loan? How much interest do you pay? Do you need a loan before or after you’ve worked out your budget and learned what’s available for credit in your area?
If you’re any sort of new entrepreneur, one of the first things that may jump out at you are the obstacles to getting started. There are lots of them, from simply getting a bank or credit union to provide a loan, to navigating those onerous laws that prevent small businesses from having access to capital. On top of that, there’s all the paperwork that comes with getting a business loan.
These are certainly challenges for everyone, but they can be even more daunting if you are an individual who doesn’t have an established network and hasn’t been working in finance for very long. But if that’s not enough of a reason for hesitation, there may be other factors at play too. It may well be easier if someone else is involved with the loan application process – someone who has already done it before and has already seen the results. Or maybe the other person is just more experienced than yourself – they may have done it before so many times that their hands-on expertise feels natural when dealing with something as complicated as finance.
This is not an insurmountable obstacle; in fact it tends to make things even easier once someone else has helped put things together. But keep in mind that even though borrowing might feel easy on paper (and with enough practice it can get pretty close), it’s still going to involve some amount of responsibility on your part . That means taking care of some paperwork and making payments when they come due – which is going to take some effort on your part too. And every time this happens there’s another step up the learning curve…
There are also various other possible reasons why people would want (or need) to establish their own collection agency:
• They might need more control over their business finances than banks or credit unions allow • They need more flexibility than banks or credit unions allow • They might only have limited funds available • They might have no clue about borrowing from different sources •• They might have never borrowed from anyone else before • They might feel uncomfortable asking others for help – maybe because they’re embarrassed or ashamed • They might have no idea where to start looking for information about borrowing This
Similar concepts to those in the previous post are discussed in the book The Lean Startup by Eric Ries. It is a fantastic guide to startups and the importance of developing a sustainable business model.
The book has some excellent advice for how to make your startup profitable. It’s worth reading to learn about financial management, managing cash flow and external financing options.