If you’re delinquent on one of your debts, the creditor might sell that debt to a debt buyer. Understanding what debt buyers are and how they operate can help you negotiate with the debt buyer or figure out a strategy for dealing with your debt.
To successfully deal with a debt buyer, you need to be aware that:
For all of these reasons, you have a great deal of leverage when negotiating with a debt buyer, much more than you might think.
A debt buyer is different than a collection agency. Debt buyers purchase old debts from original creditors, like banks, credit card companies, and car loan lenders. Unlike a collection agency, which only tries to collect as a service to the creditor, the debt buyer actually owns the debt.
How debt buyers make money. Debt buyers normally buy thousands of debts in bulk sales from original creditors at deeply discounted prices. Debt buyers make money by acquiring debts cheaply, and then trying to collect from the debtors. Even if the debt buyer collects only a fraction of the amount owed on a debt it buys—say, two or three times what it paid for the debt—it still makes a significant profit. This is why you often get the best settlement offer after a debt buyer has purchased your debt.
How you can tell if a debt buyer bought your debt. The easiest way to find out if your debt has been purchased by a debt buyer is to read your mail. You will probably receive a letters from the debt buyer stating it has purchased the debt. You can also check your credit report. If you see a debt with your original creditor marked as “charged off” or something similar, and then see another company with a debt in the same amount, but with a more recent date, that company is likely a debt buyer.
If you’re receiving demand letters and phone calls from a debt buyer about a legitimate debt—and the debt buyer hasn't filed a lawsuit against you—the first decision you should make is whether you should ignore the debt or deal with the debt buyer.
If the debt is outside the statute of limitations—the time period in which the debt buyer must bring its lawsuit—you can safely ignore the debt buyer’s demands. Usually, the statute of limitations falls somewhere between three to six years.
If the debt is recent and you have income or assets that can be taken to pay the debt, you probably should consider dealing with the matter before the debt buyer sues you. It might make sense to hire an attorney to send the debt buyer a letter asking for additional information about the debt. Sometimes debt buyers will stop their attempts to collect once they know you have counsel. If the debt buyer continues to hound you for payment, an attorney can help you arrange a settlement. You might find that you can reach a compromise that will allow you to slash your delinquent debt by as much as 40-75%. (Be aware that you might have to pay taxes on the forgiven amount.)
Removing negative information from your credit report. You should always ask the debt buyer to have the original creditor remove derogatory information from your credit report as part of any settlement. The debt buyer is unlikely to agree, but making the request gives you leverage during the settlement negotiations. If the debt buyer believes that your request is a deal breaker, it may be willing to accept less money in settlement. (Learn more in Debt Buyers and Your Credit Report.)
Beware of entering into a new payment arrangement. The debt buyer might pressure you to enter into a payment arrangement, because doing so provides it with a stream of income as long as you continue payments. You should only agree to this as last resort. Here’s why. Bad debts will generally remain on your credit report for seven years. But if you enter into a payment agreement with the debt buyer, this creates a new debt and a new contract. The debt buyer may report this new debt to the credit bureaus. If you miss a payment, it will damage your credit.
Also, the debt buyer could sue you if you fail to make payments under the new agreement. It’s much easier for a debt buyer to sue you on a new contract than to sue you on the original debt.
Some debt buyers sue regularly. If a debt buyer files a lawsuit against you, you should respond and include any defenses you have to the suit, like the debt was discharged in bankruptcy or the statute of limitations has expired.
What happens when you respond to the suit. If you respond to the suit, the debt buyer will have to prove you owe the money and that it owns the debt. Debt buyers rarely succeed in litigation against consumers who fight back. This is due in large part to the fact that debt buyers often lack the documentation required to prove their case in court. Though, if the debt buyer has all of the documentation that it needs to prove its case, you might want to try settling the case before it goes to trial. The debt buyer could be willing to settle for less than you owe in order to avoid the expense of a trial. (To learn more, see What To Do If A Debt Buyer Sues You).
What happens if you don’t respond. If you don’t file a timely response to the lawsuit with the court, a judge may enter a default judgment—an automatic win for the debt buyer—against you. The debt buyer may then use various collection methods, like garnishing your wages or levying your bank account, to collect from you.
If you’re receiving calls and letters from a debt buyer trying to collect a debt from you—or if a debt buyer is already suing you—consider talking to an attorney to find out what to do in your particular circumstances.