How do debt collectors work? I had [a post about debt](https://www.reddit.com/r/YouShouldKnow/comments/fgfal5/ysk_you_have_rights_when_it_comes_to_debt/?utm_source=share&utm_medium=ios_app&utm_name=iossmf) in another sub that went viral so I’ve been getting a lot of comments on it. There’s so many people saying that they didn’t acknowledge their debt and eventually the debt collectors stop trying.
How tf is this a viable business? From what I understand, they buy debt at a discount and charge the full debt or even more than 100% to profit. Do most people pay the debt collectors? It seems like if a lot of people don’t pay that this would not be a feasible business to ever start.. so they obviously make money some how. Am I on the right track or am I missing something?
In: Economics
People are afraid of Vultures, these companies prey on disadvantaged folks mostly and often the debt is sold to more than one company so like most of “murican” capitalism it comes down to vomiting on a fence and whatever sticks makes them profit. It’s shady at best, pure grossness at its worst. If you work for one of these get a job that builds people up because debt is a complicated thing.
Debt collectors pay, on average, about 1/25th of the debt to get the rights to it.
If 1 in 25 people pay, they break even (not considering operating costs)
This doesn’t even count the people who partially pay.
Since more than 4% pay, they make money.
As you noted, they buy the debt at a (steep) discount. They’re betting on being able to recover enough of the full debt, on average, to turn a profit. Whether or not they do make a profit all depends on how much they paid for the rights to collect the debt, and how many debts they successfully collect. Clearly many of them do make a profit, though, given that this is apparently a viable business model.
You can compare this to how an insurance company operates. Sure, if a lot of people’s houses catch fire and you don’t charge a high enough premium, then your insurance business isn’t viable. But if you properly assess the risks that your clients run and adjust premiums accordingly, you can make money.
Many people pay the debt or agree to a settlement for a portion of the debt because they don’t want to be sued, don’t want a judgment against them, want to fix their credit, or other reasons.
Also, in some situations the debt can be paid back involuntarily, through wage garnishment, bank garnishments, property levies and more.
If the debt collector is good at what they do, it can be extremely profitable.
Source: Am a debt collector
Debt collectors can operate in different ways.
The type you’re referring to are debt purchasers. These types of business purchase the debt that other businesses don’t want to collect (usually it’s not feasible for them to do so, so they don’t bother). Because this is debt the original business has no intention of collecting, they sell it at a massive discount (sometimes as little as 5% of the debt). This gives the collector legal rights to seek compensation for the debt. Even if they only collect on 10% of the debt, that’s still a 100% profit on their investment. Banks often do this on small loans that default. It’s more financially effective to sell the debt at a loss, than employ people to chase it.
However, this isn’t the only type of debt collector. Perhaps more common are the traditional “repos”. These businesses offer their services to everything from banks and hedge funds, to corner shops; depending on their niche. The original business has a customer who defaults on a legally payable debt, so they contract a repo agency to collect it for them. The repo agency then seeks compensation on behalf of the business, and when successful, takes their fee. This is cost effective when the debt exceeds the fee of the repo agency, however some of the time, business contract repos regardless of the size of the debt, in order to dissuade the public from defaulting on their debts.
How do they get money from people who refuse to pay? Multiple ways. Repo law is pretty complicated, but it does allow for certain things in certain situations. If a loan was taken, and then used to purchase a car, the repos can **sometimes** take that car as compensation for the loan.
However, in the vast majority of cases, repos are employed to “handle” people. They try the carrot first “we’re here to help, our client wants to take you to court, but we want to work this out, can you pay us 20% of the loan? That would be enough to keep this out of court, and then we can organise a payment plan”. If that doesn’t work, they try the stick (coming to your door, legal action, taking things).
They purchase the debt from someone else. They get more money back than they spend.
A simple example. Jeff owes Visa $15,000. He hasn’t paid a single cent in over a year. I buy the debt from Visa for, say $500. Visa is happy, because $500 is better than nothing.
I go after Jeff and he agrees to pay me $1,500. He’s happy because it’s less than paying $15,000, and the calls and letters will stop, and it will show on his credit report that the debt is settled.
There are people who just never pay up. Say, I also purchased Mike’s debt of $20,000 and I paid $500 for it. But he keeps ignoring me, or maybe he moved and changed his phone number and I don’t know how to contact him. You might think I’m out $500, but remember, I made $1,500 from Jeff. So this week I brought in $1,500, and I spent $1,000, so I made a total of $500.
Now there’s a bit more to it than that, but the basics is they spend less than they make. Some debt collectors purchase multiple people at once, for steep discounts. So out of 10, if they get 2 or 3 to pay, that could be enough to make a profit.
Ignoring a debt collector only works if its something that’s already paid off or a debt you were never responsible for to begin with.
Just ignoring them when there is a legit claim of payment is going to tank your credit and they most likely will use legal means to get your debt.
They only give up if they know there’s no chance of getting it from you and they don’t have any other avenues to force it out of you.
* They are good at getting people to acknowledge their debts, sometimes with persistence, sometimes with trickery, sometimes with scare tactics.
* Ignoring debt collectors is not without consequences. People who ignore legitimate debt collection attempts often wind up paying off those debts, with interest and penalties, when they need to get a loan.
* Debt collectors can and often do take debtors to court.
* They pay pennies on the dollar for debts, they only need to collect on a small fraction to make a profit.
Lots of companies will “sell” their rights to a debt for a very small fee.
A defaulted small bank loan is a loss for the bank. It can’t be realistically collected because the cost of pursuing the payments is too high. The banks know it and account for it as part of their business.
But, very importantly, banks cannot allow people to simply not pay their loans without consequences. That would only encourage others to do the same and ruin the bank. So they transfer the debt to a specialized company, for only a token fee, not really because they want to regain their loss but more importantly to harass the debtor and make sure others know that defaulting on that bank is a bad idea.
Also, lots of debt collectors don’t really do anything and they run their business at very low costs. In my example (some shop claimed I had a £300 debt with them, which I did not. Somebody of the same name must have done it), they were simply sending me letters for a few years with stern warnings and legal threats. I contacted them back, only once, and tod them in on uncertain terms that it isn’t my debt and I won’t pay it. They didn’t do anything else – just computer-generated letters every few months, so it didn’t cost them much to annoy me.
After a few years (when the debt was about to legally expire) they went to small claims court, paid £70 fee and quickly resigned after I sent a letter to the court and demanded proof that I was responsible for the debt. I’m happy to report that they lost money in my case.
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