Buying Bad Debt - What Is It?
The term "bad debt" describes money owed to a company that has been deemed uncollectible.
This money remains on the books as an expense, thus lowering the company's net income.
Companies will "write off" a bad debt: charge a matching asset amount (essentially erasing the debt) but will still lose any profit that may have come from collecting the original debt.
In an effort to alleviate losses, some companies will "sell" their debt.
It is most frequently a last ditch effort to reduce the negative impact outstanding accounts have on a company's bottom line.
This is a relatively new practice.
In the past, creditors would simply write off these accounts using the reasoning that it was not cost effective to dedicate a lot of resources to the collection process.
Now, with more people defaulting on what they owe, credit collection agencies and other businesses are purchasing these debts for a fraction of their monetary value.
Whatever the collection agency can get from the consumer then earns them a profit.
For example: Mary owes $1000 to Big Time Electronics.
Mary loses her job and is unable to pay her bill.
Big Time Electronics sells the debt to Credit Pro for $300.
Credit Pro works out a deal with Mary for her to pay off her $1000 debt over 24 months.
Credit Pro has earned a profit of $700 from this venture.
Sometimes creditors are a little overzealous in their attempts to collect.
When a debt passes through several hands, records may be lost or duplicated and a consumer may find themselves pursued for a debt which they have already paid in part or in full.
Proving this to a persistent collection agent can be challenging.
Diligent record keeping on both side of the table can help resolve these situations.
Individuals can essentially buy their own bad debt through debt consolidation.
This means that a person can negotiate a payoff amount with each creditor and, through a third party loan or a debt consolidation service, can pay off their creditors.
What the consumer is left with is one bill- the debt consolidation loan- to pay off.
This practice can lower the total amount of what it owed, as well as potentially reduce the amount of interest being incurred.
Buying bad debt is not just about making a profit.
It can be also be a tool for debt consolidation or for avoiding bankruptcy.
This money remains on the books as an expense, thus lowering the company's net income.
Companies will "write off" a bad debt: charge a matching asset amount (essentially erasing the debt) but will still lose any profit that may have come from collecting the original debt.
In an effort to alleviate losses, some companies will "sell" their debt.
It is most frequently a last ditch effort to reduce the negative impact outstanding accounts have on a company's bottom line.
This is a relatively new practice.
In the past, creditors would simply write off these accounts using the reasoning that it was not cost effective to dedicate a lot of resources to the collection process.
Now, with more people defaulting on what they owe, credit collection agencies and other businesses are purchasing these debts for a fraction of their monetary value.
Whatever the collection agency can get from the consumer then earns them a profit.
For example: Mary owes $1000 to Big Time Electronics.
Mary loses her job and is unable to pay her bill.
Big Time Electronics sells the debt to Credit Pro for $300.
Credit Pro works out a deal with Mary for her to pay off her $1000 debt over 24 months.
Credit Pro has earned a profit of $700 from this venture.
Sometimes creditors are a little overzealous in their attempts to collect.
When a debt passes through several hands, records may be lost or duplicated and a consumer may find themselves pursued for a debt which they have already paid in part or in full.
Proving this to a persistent collection agent can be challenging.
Diligent record keeping on both side of the table can help resolve these situations.
Individuals can essentially buy their own bad debt through debt consolidation.
This means that a person can negotiate a payoff amount with each creditor and, through a third party loan or a debt consolidation service, can pay off their creditors.
What the consumer is left with is one bill- the debt consolidation loan- to pay off.
This practice can lower the total amount of what it owed, as well as potentially reduce the amount of interest being incurred.
Buying bad debt is not just about making a profit.
It can be also be a tool for debt consolidation or for avoiding bankruptcy.
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