How is it profitable at all to auction debt for pennies on the dollar?
In: Economics
So, lets say you are a company that has a customer that has a debt to you, like a hospital. Someone owes you $50,000. You’ve tried for a long time to get the money, and you just aren’t getting paid.
So you sell the debt at lets say 10 cents on the dollars. You get $5k for the $50k owed. $5k is better than nothing. And nothing is what you had before.
The company that buys the debt, tries to collect from the debtor. They offer the debtor a reduced rate, like $35k. Because even if they get $35k it’s a profit over the $5k they paid for the debt. But the debtor never pays.
So the company sells the debt again. Maybe they get 50 cents on the dollars, but hey, getting $2500 is better than zero.
That next debt company tries to collect the debt of $50k. They offer huge discounts again, maybe even going as far down as $20k to settle the debt, because they’ve only paid $2500 for it. But, no go. So they file a lawsuit and go to court. Now their costs go up, lawyers fees, court fees, etc, but in court they are likely to get better outcome. The court sides with them, but, the borrower has no unprotected income. They are on disability, so the income cannot be touched. Well, this debt company just lost $2500 plus all the fees. Maybe a total of $5k.
That’s for someone who doesn’t pay. Now consider the first debt company gets paid. Instead of losing $2500, they settle the debt at $35k. Now, they just made a $30k profit.
Or, the 2nd debt company is the one who ends up collecting on the debt. They get the court to award them the debt and garnish wages. So now, they are collecting $400 a month, but over a few years collects most of the money. They make the profit.
The profitability comes when debt company 1 or 2 actually get to collect their money. The hope for those companies is for all the debt they buy cheap, if they can ultimately collect on just a few of those debts, they will make a profit.
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