Definition

A debt buyer is a company, or individual, that purchases delinquent or charged-off debts from a creditor for a fraction of the face value of the debt. The debt buyers can then collect its own debt, assign the debt to a third-party collection agency, repackage and resell all or a portion of the purchased portfolio, or any combination of these options.

Industry Background

The debt buying industry in the United States began as a result of the Savings & Loan Scandals of the 1980’s. During this time, banks were closing at an alarming rate and the FDIC or Federal Deposit Insurance Corporation received the assets of the bank to cover the expenses associated with repaying the closed banks’ depositors.

When the FDIC (and eventually the Resolution Trade Corporation or RTC) took control of the assets they had to find institutions, organizations and private investors that would be willing to purchase the assets of closed banks including both performing and non-performing (delinquent or charged-off) accounts.

The RTC held auctions around the country allowing organizations to bid for portfolios of mixed assets. At these auctions the bidders were not able to evaluate the assets prior to bidding and most purchasers had no idea what they had purchased until they had left the auction.

The availability of these assets to the general public was the fuel used to launch the debt buying industry.

Industry Overview

Due to the historic profitability of the business, the debt buying industry has seen dramatic expansion in recent years. Debt buyers purchased approximately $110 billion in face value of delinquent debts in 2005, which is about double the amount bought in 2000. In 2008, debt sold on the debt market well exceeded Credit card debt sold in 2005, in fact, the amount sold every year since 2005 has increased and is still increasing. Currently, credit card sales comprises seventy percent of the accounts sold to debt buyers, followed by automobile loans, telecommunications debt and retail accounts.

Depending on the age, history and type of debt being sold, a buyer typically pays between 3 and 25 percent of the principal (face) value. Accounts that come directly from the original creditor without having been placed with a collection agency are known as fresh debt and fetch the highest prices among RAW debt. Prices vary upward for debt with judgments or if the debtor is known to own their home or be employed. Prices for all types of debt tends to decreasing decrease based on the number of agencies that have previously attempted to collect the debt. As a result of the 2008 economic downturn, prices for the best accounts have fallen from approximately 9 to 16 cents on the dollar to below 4 cents or in other words, from 9% to 16% of face value to below 4% of face value.

Debt buyers range in size from very small private businesses to multi-million dollar publicly traded companies - there are currently four publicly traded debt buyers. NCO, previously the largest debt collector was taken private in 2006 after merging with One Equity Partners. As the visibility and profitability of the industry has grown, so too, has competition, both in terms of the number of debt buyers and the rising prices of bad debt. Additionally, there is a secondary market for this debt, with several of the debt buyers reselling the debt.

Debt buyers may be classified as "active" -- those who collect the accounts they purchase, or "passive" -- those who invest in the debt and outsource the collection activities to a separate collection agency.

Secondary Debt Buying Market

In 1993, Courts authorized third party collectors to buy and collect on bank originated revolving credit card accounts, however, at that time, there were only a handful of collection firms in a position to buy such debt. Within a short time, many other companies heard about this opportunity and wanted to join in the action. By 1998 the debt buying opportunity had grown to include buyers of both large and small size. Due to the varying size of debt buyers, and given the fact that all organizations does not have the capital required to purchase large portfolios directly from debt originators, selling accounts in a secondary debt market became popular. This secondary market was created to provide the largest debt buyers a means to sell the debt they did not desire to collect. As time went on, some very large debt buyers became brokers, selling most, and in some cases all, of the debt they purchased from banks. Historically, smaller debt buyers would wait and purchase their accounts from a larger buyer after that larger buyer had already removed many of the more desirable accounts from the portfolio. But the market today has changed such that high grade accounts are available to most of the smaller debt buyers as well.

Industry Statistics

Total US Consumer Debt (end of 2008) ........................... $970 billion dollars *

Avg. Credit Card Debt Per household ............................ $9,800 *

Avg Number Credit Cards per Individual ......................... 4 *

Credit Card Debt Defaulted on Annually ......................... 5% +

* reference: http://www.federalreserve.gov/econresdata/releases/statisticsdata.htm and http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php#interestrates

Projected Credit Card Debt Write-Downs in 2009 (USD)

Growth of Consumer Debt Since 1990

Source: http://www.rgemonitor.com/economonitor-monitor/254734/the_us_credit_card_industry_in_2009

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