How is debt sold?

Debt collection agencies are businesses that buy up debt or “act on behalf” of creditors with the intention of profiting handsomely from the debts they collect.

However, in the scenario in which the debt collection agency works on behalf of the creditor, the creditor still owns the debt.

It’s a bit technical, but for those of you who are interested, here’s a breakdown of how these organisations can make a considerable profit from their work:

Some debt collection agencies specialise in buying debt portfolios totalling of 100’s of millions of pounds worth of defaulted debt. They pay somewhere between 3-10% of the actual debt value. So, for example, if they bought for 3%, they would pay 3p for every £1 of debt owed. Let’s say a creditor has a debt portfolio of £500,000, and the DCA is paying 3% for that portfolio; they would purchase it for £15,000, with the intention of collecting a total of £500,000 or at least substantially more than what they paid for it.

It might seem like there are many debt collection agencies in the UK, but most—if not all—are owned by a handful of multi-billion-dollar organisations heavily involved in global debt buying. A private equity firm is an example of this type of company.

If sold, your debt could end up owned by a completely random U.S. company like PRA Group.

If you can’t pay your agreed-upon payments toward your Unsecured Debts, eventually, your account will Default.

This means that your debt has become a bad debt to the creditor, which is seen as a loss.

At this point, your account is moved to the Internal Recoveries Department, often an automated system that functions via workflows. These systems automatically manage the recovery of your debt by sending auto-generated letters and assessing the viability of selling it to a debt collector.

The process generally kicks off when you’re struggling financially and contact the creditor because you can’t afford to pay the agreed amounts towards your debt. It’s probably best to use an example to explain this….

However, it’s essential to understand that your debt is one of hundreds, probably thousands of defaulted debts. The creditor's recovery department doesn’t sit there cold calling debt collectors to sell your debt – mainly because the process is computerised – but also due to several other factors that come into play if and when debt is sold. We say if because there is a chance your debt may never get sold!

You see, creditors periodically make portfolios available for purchase when they feel it’s time to cut their losses and cash in on a chunk of their debt. There is no set time for this. It’s just when they have a portfolio large enough to sell. If your debt is at the recovery stage, you might think this is the point at which your debt will be sold. It’s a fair assumption to make but not necessarily true. It depends on what the bank's internal systems say. Yep, it’s all about those systems. The system decides whether your debt is financially better to be sold or to remain with the creditor.

Well, the reality is that it could be a combination of things like the age of the debt, its value and how much the bank receives from you each month, as well as your payment history. For example, a £50,000 debt that is six years old, with no successful contact or payment history, may have significantly less value than a £10,000 debt that is six months old, receiving regular monthly payments of £50.

If you’ve been paying £1 per month for a £20,000 debt, you’re only paying off £12 per year. If the bank could sell it for 3% of the value now, they’d get £600 towards the debt. It would take 50 years to make that money on the current payment plan, so it makes business sense for the creditor to include it in their upcoming debt portfolio. However, if you’re paying £50 per month, then it may make sense for them to keep hold of the debt. Whereas, if you’ve been paying £1 per month for six years, the debt sale value will likely be so low that it may not be worth selling. In the last scenario, the creditor might hold onto that debt until it has a large enough portfolio of similar debts to sell simultaneously.

If your debt is eventually sold, the new owner and the previous creditor will notify you. Please do not confuse your debt being sold with someone collecting on behalf of the bank because this does happen.

Some categories of debts are Statute Barred, which may sell for peanuts as they cannot be pursued via the court system. In this scenario, a CCJ can’t be issued if you continue not to pay the debt unless you trigger it. Read more about Statute Barred debt here.

Finally, there is a chance that your debt doesn’t fit the sale criteria, so it’s never sold. The sale criteria will vary from creditor to creditor and from portfolio to portfolio. It’s pretty much impossible to know if or when your debt will be sold to a debt collector, but you can understand how it works with the information above.

The Real Debt Guy is a qualified financial adviser and a UK debt expert. The information in this article is considered to be true and correct at the publication date.