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How Much Do Debt Collectors Pay for Debt?
by
JG Wentworth
•
July 26, 2024
•
9 min
When you default on a debt, whether it’s a credit card balance, medical bill, or personal loan, you might assume that the original creditor will be chasing you for payment forever. But that’s often not the case. Enter the world of debt buyers and debt collectors – a multi-billion-dollar industry that operates largely behind the scenes of consumer finance.
For those struggling to pay off their debt, knowing more about how this industry operates can be an eye-opening, and potentially helpful, experience.
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.
What is debt buying?
Before we dive into the numbers, let’s clarify what we’re talking about. Debt buying is when a company purchases delinquent or charged-off debts from creditors for a fraction of the debt’s face value. They then attempt to collect on these debts, hoping to make a profit.
The process, in a nutshell:
- Creditors bundle together similar types of debt into portfolios.
- These portfolios are then offered for sale, often through a bidding process.
- Debt buyers analyze the portfolios and make offers based on their assessment of collectability.
- Once purchased, the debt buyer now owns the debt and has the right to collect on it.
So, how much do they pay?
Now, for the million-dollar question (or more accurately, the pennies-on-the-dollar question): How much do debt collectors actually pay for these debts? The short answer is: It varies, but it’s usually much less than you might think.
On average, debt buyers pay pennies on the dollar for old debt. Yes, you read that right – mere pennies for each dollar of debt. However, this is an average, and the actual amount can vary widely based on several factors:
- Age of the debt: The older the debt, the less it typically costs. Fresh debts (less than 6 months old) might sell for 7-15 cents on the dollar, while debts that are several years old might go for less than a penny on the dollar.
- Type of debt: Different types of debt command different prices:
- Credit card debt often sells for 4-7 cents on the dollar.
- Medical debt might go for 1-5 cents on the dollar.
- Mortgage deficiencies can sell for 2-5 cents on the dollar.
- Previous collection attempts: If the debt has already been through multiple collection attempts, its value decreases.
- Documentation: Debts with complete documentation (proof of the original agreement, payment history, etc.) are worth more than those with incomplete records.
- State laws: Some states have more debtor-friendly laws, which can decrease the value of debt in those states.
- Economic conditions: During economic downturns, debt prices often decrease as collectors anticipate it will be harder to recover money from struggling consumers.
Real-world examples
To put this into perspective, let’s look at some real-world examples:
- In 2013, the FTC reported that debt buyers paid an average of 4 cents per dollar of debt face value.
- A portfolio of credit card debt with a face value of $1 million might sell for $40,000 to $70,000.
- Older, less collectible debt might sell for as little as $10 per account, regardless of the balance.
Why so cheap?
You might be wondering why creditors are willing to sell debt for such a low price. There are several reasons:
- Recovery rates: Debt buyers typically only expect to collect on a small percentage of the debts they buy. Many debts will never be collected.
- Time value of money: For the original creditor, getting some money now is often preferable to the uncertainty of collecting the full amount later.
- Resource allocation: Creditors prefer to focus their resources on current customers rather than chasing old debts.
- Tax benefits: In some cases, writing off bad debt can provide tax benefits to the original creditor.
The profitability question
Given these low purchase prices, you might be wondering how debt buyers make money. The key is volume and efficient collection practices. If a debt buyer purchases a $1 million portfolio for $50,000, they only need to collect a small fraction of the total debt to turn a profit.
Ethical considerations
It’s worth noting that the debt buying industry has faced criticism and increased regulation in recent years. Issues include:
- Attempts to collect on time-barred debts (debts too old to legally collect).
- Insufficient documentation leading to collection attempts on already paid debts.
- Aggressive or illegal collection tactics.
- As a result, regulations like the Fair Debt Collection Practices Act (FDCPA) have been put in place to protect consumers.
What this means for you
Understanding how little debt buyers pay for debt can be empowering for consumers:
- Negotiation power: Knowing that the collector likely paid very little for your debt can give you leverage in negotiating a settlement.
- Perspective on collection calls: Aggressive collection tactics might seem less intimidating when you understand the economics behind them.
- Motivation to address debts early: The low sale price of old debts underscores the importance of addressing financial issues early, when you have more control over the situation.
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Want to avoid debt collectors?
If your mounting debt is becoming more than you can reasonably manage by yourself, you might want to consider debt relief. At JG Wentworth, we’ve helped countless individuals resolve their debt through our Debt Relief Program.* In fact, if you have $10,000 or more in unsecured debt, there’s a good chance you’ll qualify and get the JGW advantage.
- One monthly program payment
- We negotiate on your behalf
- Average debt resolution in as little as 48-60 months
- 24/7 support
- We only get paid if 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?
The bottom line
Debt buyers typically pay pennies on the dollar for consumer debt, with prices varying based on the debt’s age, type, and collectability. While this practice allows original creditors to recoup some losses and move on, it also creates a secondary market that can sometimes lead to aggressive collection practices.
For consumers, understanding this industry can provide valuable perspective when dealing with debt collectors. Remember, if you’re struggling with debt, there are resources available, including credit counseling services and legal aid organizations that can help you understand your rights and options.
The world of debt buying and collecting is complex, and while it serves a function in the financial ecosystem, it’s crucial for consumers to be informed and aware of their rights when dealing with debt collectors.
About the author
* 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.
JG Wentworth does not pay or assume any debts or provide legal, financial, tax advice, or credit repair services. You should consult with independent professionals for such advice or services. Please consult with a bankruptcy attorney for information on bankruptcy.