Can Buy Now, Pay Later Debt Be Sold to Debt Collectors?

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The buy now, pay later (BNPL) industry has exploded in popularity over the past few years, with services like Klarna, Afterpay, Affirm, and Sezzle becoming household names. These platforms promise consumers the ability to split purchases into manageable installments, often with no interest if payments are made on time.

However, as with any form of credit, questions arise about what happens when consumers fall behind on their payments. One critical question many users have is whether BNPL debt can be sold to debt collectors, and what implications this might have for their financial health.

Understanding buy now, pay later services

Before diving into debt collection practices, it’s important to understand how BNPL services operate. These platforms typically allow consumers to split a purchase into three or four equal installments, with the first payment due at the time of purchase and subsequent payments scheduled over the following weeks or months. Some services offer longer-term financing options with interest rates, while others focus on short-term, interest-free splits.

BNPL companies make money through merchant fees charged to retailers, interchange fees from payment processing, and in some cases, interest and late fees charged to consumers. The business model relies heavily on consumer adoption and repeat usage, which has led to aggressive marketing and easy approval processes.

The legal framework surrounding BNPL debt

The regulatory landscape for BNPL services has been evolving rapidly. Unlike traditional credit cards or personal loans, BNPL services have operated in a relatively gray area of consumer finance regulation. However, this is changing as regulators become more aware of the potential risks these services pose to consumers.

In the United States, BNPL services are subject to various federal and state consumer protection laws, including the Fair Debt Collection Practices Act (FDCPA), the Fair Credit Reporting Act (FCRA), and state-specific debt collection regulations. These laws govern how debts can be collected, what information can be reported to credit bureaus, and what rights consumers have when dealing with debt collectors.

Can BNPL debt be sold to collectors?

The short answer is yes, BNPL debt can be sold to debt collectors, just like most other types of consumer debt. When a consumer defaults on their BNPL payments, the original creditor (the BNPL company) has several options for recovering the outstanding balance. These include continuing internal collection efforts, hiring a third-party debt collection agency to collect on their behalf, or selling the debt outright to a debt buyer.

The decision to sell debt typically depends on several factors, including the age of the debt, the likelihood of collection, the costs associated with internal collection efforts, and the company’s overall debt management strategy. BNPL companies, like other creditors, may find it more cost-effective to sell older or smaller debts to debt buyers who specialize in collecting charged-off accounts.

How BNPL companies handle delinquent accounts

When a consumer misses a BNPL payment, the process typically follows a predictable pattern:

1. Initially, the BNPL company will attempt to collect the debt internally through automated reminders, phone calls, and email communications. During this phase, consumers may be offered payment plans or other arrangements to bring their accounts current.
2. If internal collection efforts are unsuccessful, the BNPL company may escalate the account to a third-party collection agency. At this stage, the debt is typically still owned by the original creditor, but a professional collection agency is hired to pursue payment on their behalf.
3. If collection efforts continue to be unsuccessful, or if the debt reaches a certain age, the BNPL company may decide to charge off the account and sell it to a debt buyer. Once sold, the debt buyer becomes the legal owner of the debt and can pursue collection independently.

The debt sale process

1. When BNPL debt is sold to collectors, the transaction typically involves the transfer of large portfolios of charged-off accounts.
2. Debt buyers purchase these portfolios at a significant discount to the face value of the debt, often paying only a few cents on the dollar. This allows them to profit even if they only collect on a fraction of the accounts they purchase.
3. The sale of debt portfolios is governed by various laws and regulations designed to protect consumers. For example, debt buyers must be able to validate the debts they’re attempting to collect, and they must comply with all applicable debt collection laws and regulations.