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When you fall behind on payments, your original creditor may eventually decide to sell your debt to a third party. This practice, while common, raises many questions for consumers about their rights, obligations, and what to expect when their debt changes hands. If you’re in a position where you debt might be sold to a third party, let’s take a closer look at how debt sales work, what they mean for you, and how to protect yourself in the process…
The debt collection timeline
Most creditors follow a similar pattern when handling unpaid debts:
- Initial collection attempts: Your original creditor typically attempts to collect the debt for 3-6 months through calls, letters, and possibly offering payment plans.
- Charge-off stage: If unsuccessful, the creditor may “charge off” the debt—a financial accounting term meaning they’ve recognized the debt as unlikely to be collected in full. This typically happens after 120-180 days of non-payment.
- Decision point: After charge-off, the creditor has three main options:
- Continue collecting internally.
- Hire a third-party collection agency (while retaining ownership).
- Sell the debt to a debt buyer.
The debt sale process
When a creditor decides to sell your debt:
- They typically bundle your account with many others into a “portfolio” of similar debts (by age, type, or geography).
- Debt buyers purchase these portfolios for pennies on the dollar—often 4-7 cents per dollar of debt for fresh accounts, and even less for older debts.
- The original creditor transfers basic account information to the buyer, though the completeness of records varies significantly.
- The debt buyer now legally owns the debt and has the right to collect the full amount, plus any allowable interest and fees, despite having paid only a fraction of the face value.
Types of debt typically sold
Nearly any consumer debt can be sold, but the most common include:
- Private student loans (federal student loans are rarely sold)
- Retail store credit accounts
- Cell phone bills
Legal framework governing debt sales
Debt sales and subsequent collection attempts are primarily regulated by:
- Fair Debt Collection Practices Act (FDCPA): Prohibits abusive, deceptive, and unfair debt collection practices.
- Fair Credit Reporting Act (FCRA): Governs how debt information appears on credit reports and your right to dispute inaccuracies.
- State-specific debt collection laws: Many states have additional consumer protections beyond federal regulations.
- Statute of limitations: State-specific time limits during which a debt collector can legally sue to collect a debt (typically 3-6 years, though some states allow up to 10 years).
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Your rights when your debt is sold
When a debt buyer purchases your debt, you maintain several important rights:
- Right to validation: You can request written verification of the debt within 30 days of initial contact.
- Right to dispute: You can dispute a debt you don’t recognize or believe is inaccurate.
- Protection from harassment: Debt collectors cannot call at inconvenient times, use threatening language, or contact you at work if you’ve told them not to.
- Right to stop communication: You can formally request that a collector cease communication (though this doesn’t eliminate the debt).
- Right to information: You’re entitled to know the original creditor’s name, the amount owed, and how to dispute the debt.
Impact on your credit score
When a debt is sold:
- The original debt may already be marked as “charged-off” on your credit report, which significantly damages your score.
- The debt may then appear under the new owner’s name, though it shouldn’t create a duplicate entry (which would be a reportable error).
- The debt’s age doesn’t reset for credit reporting purposes. Negative information, including charge-offs, can legally remain on your credit report for seven years from the original delinquency date.
- Paying or settling the debt with the new owner doesn’t remove the negative mark, but it does update the status to “paid” or “settled,” which looks better to future creditors.
Special situations in debt sales
Certain circumstances that may apply to your specific situation:
Zombie debt
“Zombie debt” refers to very old, time-barred debts (past the statute of limitations) that debt buyers purchase for extremely low prices, hoping to collect. Be aware:
- Making even a small payment on time-barred debt can “revive” the debt in some states, resetting the statute of limitations.
- You can’t be legally forced to pay a time-barred debt through a lawsuit, but collectors may still attempt to collect.
Multiple sales
Some debts are sold repeatedly among debt buyers, often with diminishing documentation:
- Each sale may result in a new collection attempt.
- Documentation quality typically deteriorates with each sale, increasing the likelihood of errors.
- Multiple ownership transfers can make it difficult to verify who legitimately owns the debt.
How to handle a sold debt
If you’re contacted by a company claiming to have purchased your debt:
- Request written validation: Send a debt validation letter requesting proof of the debt and their right to collect it.
- Check the statute of limitations: Determine if the debt is time-barred based on your state’s laws.
- Review your credit report: Verify the debt appears correctly and isn’t duplicated.
- Consider your options:
- Pay in full if the debt is valid and you can afford it.
- Negotiate a settlement (typically 40-60% of the balance).
- Set up a payment plan.
- In some cases, disputing the debt may be appropriate.
- Get everything in writing: If you agree to a settlement or payment plan, get the terms in writing before sending payment.
Prevention and protection
To protect yourself regarding debt sales:
- Keep records: Maintain copies of all loan agreements, payment records, and correspondence with creditors.
- Act on notices: Respond promptly to collection notices, especially validation requests.
- Monitor your credit report: Check regularly for accuracy and dispute errors.
- Know your rights: Familiarize yourself with the FDCPA and your state’s debt collection laws.
The bottom line
Debt sales are a standard industry practice that allows creditors to recover some value from unpaid accounts. While this process can be confusing and sometimes frustrating for consumers, understanding how it works empowers you to respond appropriately, protect your rights, and make informed decisions about resolving your financial obligations.
Remember that each debt situation is unique, and for complex cases, consulting with a consumer law attorney or credit counselor can provide personalized guidance tailored to your specific circumstances.
There’s always JG Wentworth…
If you have $10,000 or more in unsecured debt there’s a good chance you’ll qualify for the JG Wentworth Debt Relief Program.* Some of our program perks include:
- One monthly program payment
- We negotiate on your behalf
- Average debt resolution in as little as 48-60 months
- We only get paid when we settle your debt
If you think you qualify for our program, give us a call today so we can go over the best options for your specific financial needs. Why go it alone when you can have a dedicated team on your side?
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* Program length varies depending on individual situation. Programs are between 24 and 60 months in length. Clients who are able to stay with the program and get all their debt settled realize approximate savings of 43% before our 25% program fee. This is a Debt resolution program provided by JGW Debt Settlement, LLC (“JGW” of “Us”)). JGW offers this program in the following states: AL, AK, AZ, AR, CA, CO, FL, ID, IN, IA, KY, LA, MD, MA, MI, MS, MO, MT, NE, NM, NV, NY, NC, OK, PA, SD, TN, TX, UT, VA, DC, and WI. If a consumer residing in CT, GA, HI, IL, KS, ME, NH, NJ, OH, RI, SC and VT contacts Us we may connect them with a law firm that provides debt resolution services in their state. JGW is licensed/registered to provide debt resolution services in states where licensing/registration is required.
Debt resolution program results will vary by individual situation. As such, debt resolution services are not appropriate for everyone. Not all debts are eligible for enrollment. Not all individuals who enroll complete our program for various reasons, including their ability to save sufficient funds. Savings resulting from successful negotiations may result in tax consequences, please consult with a tax professional regarding these consequences. The use of the debt settlement services and the failure to make payments to creditors: (1) Will likely adversely affect your creditworthiness (credit rating/credit score) and make it harder to obtain credit; (2) May result in your being subject to collections or being sued by creditors or debt collectors; and (3) May increase the amount of money you owe due to the accrual of fees and interest by creditors or debt collectors. Failure to pay your monthly bills in a timely manner will result in increased balances and will harm your credit rating. Not all creditors will agree to reduce principal balance, and they may pursue collection, including lawsuits. JGW’s fees are calculated based on a percentage of the debt enrolled in the program. Read and understand the program agreement prior to enrollment.
This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that you consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.