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
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).
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