The Ins And Outs of Junk Debt Trading
Let’s say for example, that at any given time, that 1,350 people default on their Wells Fargo or Capital one cards, and in-house collections have only resulted in the partial recovery of money from maybe 350 people.
So the lender is left with a thousand debts that will be very expensive, and very difficult to collect.
Now let’s assume that the average balance on each card is $5,000.00
If we now multiply $5,000 by 1000 we find that Capital One or whoever the lender happened to be, is now looking at five million dollars of unpaid debt, and my figures are very conservative.
A Working Example
On June 20th 2009 , a website offered to sell a batch of Chapter 7 bankruptcy accounts, that had a face value of $200 million.
The sale was on behalf of Collect America, which is one of the nation’s largest debt buyers and collectors, and you will now appreciate that my earlier example of five million dollars, was very low-ball indeed.
So What Options Does The Credit Card Company Have?
a)It can hire a large number of debt collectors.
b)After which it can hire law firms to fight the cases.
c) It can sell the debt.
Well “a” and “b” might seem viable options at first glance, but the debtors first have to be located, then taken to court, and even if the court orders them to pay it’s unlikely that they’ll be able to, because if they’d had money, then it’s unlikely that they’d have defaulted in the first place.
In Reality Every Major Lender Chooses “c”.
It’s Now Time For The Auction To Start!
What happens next is that the debts are bundled into a portfolio, and the highest bidder will get them.
The bidding will start very low however, and will often begin with as little as five or six cents on the dollar, because the junk companies know very little about the contents of a portfolio until after they buy it.
They’re bidding on a cat in a sack, or a pig in a poke!
What Do The Junk Firms Know When They Bid?
a) They know the number of accounts.
b) The average balance.
c) The average charge off date.
d) How many working phone numbers exist.
The Bidding Is Over
The bidding goes from 5 cents on the dollar to 8 cents on the dollar and Junk Firm X is the lucky or unlucky winner, and it now owns the portfolio.
It’s important to note that Junk Firm X will never be listed as the original creditor, and is therefore subject to the Fair Debt Collection Practices Act.
What Happens If The First Junk Firm Can’t Collect?
From that point on, the whole debt collection thing often becomes really nasty, and we’re talking about verbal threats, and using loopholes in the law.
The original lender might have seemed uncaring and tough, but it would never threaten somebody in intensive care with legal proceedings.
The first junk buyer was probably even less caring, and he might have been underhanded and tricky, but the next one will most likely make him look like a saint.
How Does The Second Junker Buy Try To Collect?
As the law stands right now, creditors are not strictly required to report to the credit reporting bureaus, details of debts that are no longer applicable because of debt settlement or bankruptcy procedures.
So the second junk buyer, who most likely bought your debt for even less cents on the dollar, will use this loophole in the law, and will quite frequently threaten to report an already settled debt to the credit agencies.
Just imagine, that you’re in the middle of buying a house or a car, and this junk buyer threatens to have your credit rating lowered.
You’ve already settled the debt once, but you have no choice but to settle it a second time, so that you can finalize the purchase of your house or car.
Hopefully you now have a much better understanding of why debts are bought and sold, and if you’re being harassed by a debt collection agency, or are worried that you might be soon, then take the time to read an article or two about debt collection techniques, and also learn about the statute of limitation on debt collection in different states.
The author of this article was a film producer, and award winning film sound editor for many years. He has an interest and natural flare for economics, so if you need a loan but are worried about your credit score, then go check out -> Need Credit Now because if offers a long list of lenders that provide, Auto Loans, Personal Loans and Mortgage Loans, plus Guaranteed Credit Cards to those with bad credit.
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