How To Buy Debt And Make Money
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Most people are familiar with debt collectors, but fewer are familiar with debt buyers. Debt buying happens in the background: very few people know about it. That said, there is a growing interest in debt buying, because investors acting alone or in companies know it can be an extremely profitable business.
If you are interested in this industry and want to learn how to become a debt buyer, this article is for you. Here we outline the crucial steps you need to take to become a debt buyer, from forming a business entity to doing the due diligence necessary to enter at times risky financial deals.
Typically, the longer a debt goes unpaid, the less a debt buyer will have to pay for it. Debt buyers may buy large portfolios of debt at a time, and when they purchase the debt, it is entirely theirs to deal with.
The primary difference between debt buyers and debt collectors is the ownership status of the debts. Debt collectors are agents acting on behalf of the debt owners. Debt buyers, in contrast, become the principals (and not the agents) vis-à-vis the debts, and can then hire agents to help them collect it.
A debt buyer is a type of debt collector who purchases a creditor's debt at a discount in order to collect on it. Creditors sometimes prefer selling their debts at a loss to debt buyers as a tax write-off.
Debt buying processes vary depending on the reasons for purchasing the debt and the type of debt you are interested in buying. For example, you may be interested in buying debt so that you can legally enforce repayment from the borrower.
In some states, it is legal to operate as a debt buyer without a license and without becoming a debt collection agency. Much more commonly, the state will require you to get licenses and permits prior to beginning any business activity (including setting up a marketing website). Some states (for example, Texas) may not require a license if you operate solely in that state but do require a license if you operate across state lines.
Ethics are important in debt buying. Depending on your location, you may find that professional and even state and federal regulatory bodies strictly enforce them. Membership in the following organizations is highly regarded when collecting or buying debt or otherwise seeking to do business in this industry (and could get you more business):
The CFPB is a federal government agency that seeks to protect consumers against predatory financial practices. With malpractice in the debt buying and debt collection industries being so prevalent, the CFPB has taken on a particular interest in this area of financial activity.
Anyone wanting to enter the debt buying business should take CFPB reports and recommendations seriously if they wish to avoid the litigative fate of so many buyers and collection agencies in this space (including Encore Capital Group, Midland Funding, Midland Credit Management, and Asset Acceptance Capital Corp., who (in)famously settled a lawsuit started by the CFPB in 2020).
The RMAI (Receivables Management Association International) advocates ethics and professionalism in debt buying and collection and has memberships for those involved in these industries. Memberships entitle individuals and agencies to:
In debt buying, you have access to a wide variety of borrower data points, from names and addresses to SSNs and bank details. The hardware and software your business uses must be secure and compliant with all legal and industry standards. This is a complex task that will require deeper research depending on the debt you are buying. Ask an attorney if you are not 100% sure about what protections you need to put in place for data security and privacy as a debt buyer.
Due diligence is critical in the debt buying realm. As a debt buyer, you have very few protections in place to protect your investments, meaning you are the sole person responsible for verifying the details and legitimacy of a debt purchase.
If you are an established debt buyer and are