This article was written in 2016 and is outdated. Check out the updated version here:
New Version - 2020 Update
My name is Bob and I'm a relatively young entrepreneur. I own a collection agency and have for 6 years now and it's been a truly humbling experience to say the least. If I didn't have a mentor when I started, I wouldn't have known where to start. This article is for anyone who may be interested in getting into the debt collection industry and wants to learn some basic information about buying debt.
HOW TO BECOME A DEBT BUYER
BASED ON THE EXPERIENCES OF A NEW YORK BASED DEBT BUYER AND COLLECTION AGENCY
PURPOSE - Before becoming a debt buyer, there are a few decisions you need to make that will affect your debt buying processes.
Define the purpose(s) and/or reasons for buying debt
• Purchasing for in-house debt collections
• Purchasing for third party debt collections (Outsourcing)
• Purchasing for brokerage (Becoming a debt re-seller)
• A combination of any of the above-listed reasons
Decide what type of debt you'd like to work with
Any time a debt is created and backed by a contract that states that the debt may be sold or outsourced, it can become available for purchase through the proper channels. There are many different types of debt which may have different laws governing the sale, statute of limitations and collection process. Make sure you look into the laws for each different type of debt. Some debt is easier to liquidate or market than others, and some debt is more common than others. Make sure you know what types of debtors' you will be dealing with and familiarize yourself with the laws. Keep in mind, laws can vary significantly from state to state. Some types of debt available for purchase are:
• Payday Loans
• Personal Loans
• Installment Loans
• DDA (Checking Account Overdrafts)
• Bad Checks (B2B/C2B/NSF/Check Guarantee)
• Credit Cards (Standard/Sub-Prime/Retail)
• RTO (Rent to Own)
• Bail Bonds
• Student Loans
• Auto Deficiencies
• Telecom
• Utilities
• Judgments
• Mortgage/Property Liens
• Familiarize yourself with the industry - There are numerous message boards and forums online that serve the Debt Buying Community. Become a part of the discussions, ask questions and meet new people. A few websites that have debt collection forums, articles, and threads include AccountsRecovery.Net, InsideArm.Com, DebtConnection.Com and CreditInfoCenter.Com.
CORPORATE AND LEGAL - The first step in becoming a debt buyer is to incorporate for the safety of the owners and officers. The most common entity in the debt buying industry and easiest to file for is an LLC (Limited Liability Company). This can be a good starting point, however an S Corp can be ideal for a collection agency with a monthly debt-buying budget whereas a C Corp may be better for a debt buying entity that is expected to make large purchases in which losses may be carried over across the fiscal year, or when expensive marketing campaigns are expected to create inconsistent revenue from year to year. Consult with an accountant when making this decision.
LICENSING AND BONDING - Not all states require you to be licensed or bonded to collect from debtors within that state, however it is a good idea to be licensed in the state you are operating in. Depending on the state, it may be illegal to operate without a license. The Inside ARM State Licensing Tool has a very useful and comprehensive tool for checking state requirements. Some states that do not require licensing or bonding include:
• California
• Montana
• South Dakota
• Missouri
• Oklahoma
• Mississippi
• Kentucky
• Ohio
• Georgia
• South Carolina
• Virginia
• Pennsylvania
• Vermont
• New Hampshire
New York State as a whole does not require you to be licensed to buy, sell, or collect on debt; however - New York City and the city of Buffalo both require licensing and bonding. Texas does not require a license unless you are registered in a different state. A New York based debt buyer wishing to collect on debt in the state of Texas must register with the Texas Secretary of State. In this scenario, the agency would also need to be Licensed and Bonded in Buffalo, NY. Make sure you know where you wish to operate and that failure to license or bond in specific states may restrict a bank or debt brokers' ability (or desire) to sell debt to you. Make sure to review the state laws for your state as well as any state that you plan to operate within.
IT/SOFTWARE AND OPERATIONAL SECURITY - Because you are planning on operating in a field where you will not only be purchasing sensitive third party financial information but likely taking payments from consumers over the telephone, by mail or electronic correspondence; it is important to have secure software and file transfer protocol in place. As a debt buyer, you will have access to anywhere from hundreds to tens of thousands of bank account numbers and social security numbers. It is important that you are using secure software, email, cloud storage, and physical security. Keep in mind that certain services such as invoicing services, file/data storage companies, web hosting servers, VoIP service providers and anything else that is not taking place directly in your office could be exposing sensitive information to a non-secure third party. Make sure that your computers, local networks, and third-party service providers are secure. Only deal with companies that take encryption and security seriously. Make sure that you have an emergency response plan in place in the event of a security breach, however the best plan is to make sure that you catch any possible vulnerabilities before a data breach can occur. To review a list of common security requirements, look up a PCI DSS (Payment Card Industry Data Security Standard) checklist. This is the best way to ensure that you are protected in all aspects.
REGULATORY ORGANIZATIONS - There are several organizations that support ethics and accountability as well as set the standard for the debt industries. Good business in the Accounts Receivable Management community is almost synonymous with belonging to or registering with the following organizations:
• DBA International (Debt Buyers Association)
• ACA International (The Association of Credit Collection Professionals)
• BBB (Better Business Bureau)
• CFPB (Consumer Financial Protection Bureau)
All 4 of the above listed organizations strive for professionalism and ethics in the field of debt buying and debt collections. The DBA and ACA have memberships for both debt-buyers and collection agencies as well as personal membership levels. They sponsor education events, networking events, and conferences with certification courses aimed to educate their members for the greater benefit of the debt industry. You can contact them directly to inquire about membership and benefits. Personally and professionally, as a debt buyer I feel MUCH more comfortable purchasing debt from a company that is certified and registered with the DBA and ACA. These organizations strive for best in class ethics. Their members truly take great pride in what they do and what they stand for.
The BBB is a privately owned company that uses a consumer complaint system to grade companies on an A+ through F scale. They act as an intermediary between consumers and businesses and make information available to the public for the purpose of a better consumer experience. To become BBB Accredited requires you to pay a yearly fee and to act in a professional and ethical manner. Being BBB accredited shows consumers that you are happy to make your company information public and allow consumers to reach out and describe their experiences and to hold businesses responsible for quality assurance.
Finally, the CFPB is an independent regulatory agency of the US government responsible for consumer protection in financial industries. As of recent years they have been very involved with the debt buying and debt collection industries. They have worked over recent years to clean up the industry and reform bad debt buying and collection practices. They have worked in part with the FTC in the past to ensure that companies or individuals exploiting consumers or practicing illegal/unethical activities within the Accounts Receivable Management industry are investigated and prevented from conducting business if they find a pattern of wrongdoing.
DUE DILIGENCE - Due Diligence is defined as "Reasonable steps taken by a person in order to satisfy a legal requirement, especially in buying or selling something". It also refers to "Doing your homework" so to speak. This is the most important step in the debt buying process. As a debt buyer, there isn't going to be much of a system in place to protect your investments so it is important to know who you are buying from, and who your sources buy debt from. The following describes our debt purchasing process as a collection agency that buys charged off debt from a third party.
We have a network of debt sellers will provide us with "Sales Lists". We have built our network on years of trial and error as well as extensive networking and referrals. As a startup, you will likely not have the capitol for trial and error, so it is recommended that you only deal with debt sellers that are registered with the DBA and/or ACA to ensure the best possible buying experience. Websites like debtconnection.com can point you in the direction of companies that have portfolios for sale. This is where due diligence comes into effect. Do some research on any prospective company you may be looking into buying debt from. If possible, only work off of unbiased recommendations.
Once you have decided on a source to buy your first portfolio from, the next step is to evaluate the debt. You will have very limited information to work with but it is important to know how to use this information to evaluate the debt. When reviewing a sale list you will be provided with the following information:
Original Creditor/Issuer
This will be the name of the credit issuer. If it is a lending institution or credit card company, this will be the name of the lender. If you are purchasing bad checks, this will be the name of the check guarantee company or ACH processing company that processed the transaction. If you are buying bank overdrafts (DDAs), this will be the name of the bank. This is who the debt was originally owed to before the debt was charged-off or sold into collections.
Type of Debt
This is self-explanatory. The type of debt may be Payday Loans, Bank Overdrafts, Credit Cards, Etc. (See page 1 for a more comprehensive list)
Face Value
This is the total principal balance of the sum of each account in the portfolio. This is what the price of the portfolio will be calculated off of. Portfolios that have been through at least 1 agency already may calculate this number off of the current balance which may include additional fees added to the accounts by the agencies or interest that was calculated by the agency.
Number of Accounts
This is the total number of accounts in the portfolio.
Average Charge-off Date
The Charge-Off date is the date that the account was charged off by the original creditor. It is usually 2-6 months after the open date depending on if in-house collection efforts were made by the creditor.
Average Balance
The average balance is the Face Value divided by the number of accounts. It will tell you the median balance of the accounts in the portfolio.
Post Charge Off Agency
This is the number of collection agencies that have worked the debt portfolio, the lower the number, the more expensive the portfolio will be. Debt liquidates the best with the first agency and significantly less with each agency after.
Shelf Life
This is how long it has been since the last collection attempt. Usually calculated as the average 'Last Worked Date'.
Chain of Title
The Chain of Title is a comprehensive list of every entity that a particular debt portfolio has been through. This is usually not available to view before purchasing the portfolio, however if you inquire with the seller they can usually provide you with the necessary information about the history of the portfolio. An example will be provided below.
Media
Media will not always be included with the debt portfolio however portfolios that contain media tend to be easier to liquidate on, and therefore more expensive. Media can include but is not limited to: Original Contracts, Check Images, Drivers License Photocopies, or any other document that may link the debt to the debtor.
Price
When reviewing the cost of the portfolio, you will see numbers like $0.065, $0.02 or 75bps (Basis Points). This is the amount that you will pay on the dollar for the debt. For example, if a portfolio has a face value of $2MM ($2,000,000.00/Two Million Dollars) and is being sold for $0.05 (Five Cents), the sale price of that portfolio would be $100,000.00. More realistically for an entry level debt buyer you may purchase $500,000.00 at face value for 75bps, you would multiply $500,000.00 X $0.0075 = $3,750.00. A basis point is one hundredth of one percent. So simply stated: Sale Price = Face Value * Cost.
SAMPLE CHAIN OF TITLE AND PORTFOLIO LISTING - The following information including the names of lending institutions, debt brokers, and collection agencies are fictitious. This is for education purposes only. The following portfolios/companies do not exist. Any names or likenesses are purely coincidental.
Sample Sale List:
Portfolio Offerings
1
Creditor: EZ Loan One
Type of Debt: Payday Loan
Face Value: $750,000.00
Number of Accounts: 1300
Chargeoff: 1/1/2015
Average Balance: $576.92
Agency: 1
Shelved Since: 9/30/2015
Media: No
Price: 0.03 | 3 Cents
2
Creditor: Bank Two N.A.
Type of Debt: Credit Card
Face Value: $1MM
Number of Accounts: 975
Chargeoff: 7/14/2013
Average Balance: $1,025.64
Agency: 3
Shelved Since: 1/6/2016
Media: Upon Request
Price: 0.0095 | 95bps
3
Creditor: Third Ck Guarantee Inc.
Type of Debt: NSF Checks
Face Value: $350,000.00
Number of Accounts: 1006
Chargeoff: 12/1/2014
Average Balance: $347.91
Agency: 2
Shelved Since: 12/1/2015
Media: YES - Check Images
Price: 0.025 | 2.5 cents
LIQUIDATION- The only way to determine how you will liquidate on a portfolio is to document agency performance. Whether you are purchasing for debt collections or outsourcing, liquidation is going to determine the value of the investment. For example, a debt buying collection agency may purchase a portfolio worth $100,000.00 at face value to collect on. If this portfolio is purchased for 2.5 cents on the dollar- a common rate for 1 agency (second placement) personal loan debt, the cost of the portfolio would be $2,500.00. To break even, you must liquidate at 2.5% plus operating costs. Once you begin documenting agency performance, you may begin to notice trends that your in-house agency liquidates around 10% on 1 agency personal loan debt costing 2.5 cents on the dollar. With that hypothetical purchase/liquidation a $2,500.00 portfolio may gross you $10,000.00 after 1 month of collection efforts. It may need to be shelved for several months to have a re-sale value of 1 cent on the dollar. That portfolio that was worth $100,000.00 at face value is now worth $90,000.00. That portfolio can now be sold for $900.00. So using this example, a $2,500 investment had grossed you $10,000.00 over the course of 1 month but $10,900 after 6 months. After taking the cost of the debt into account, you are up $8,400.00. If the cost of the payroll and other operating expenses is less than $8,400.00, you had successfully profited from a debt purchase.
The reason it's important to know how well you expect to liquidate is because depending on state laws, you may not be able to send out letter campaigns, use an automated dialer, or work through $100,000.00 worth of debt over the course of 1 month successfully. If you plan on placing that portfolio out to a third-party collection agency at 50% commission, that will liquidate at 5%, you will only see $2,500.00 of the $5,000.00 gross amount collected. You may then need to wait 6 months to 1 year before the portfolio has a 1 cent resale value.
Once you have an understanding of how debt will liquidate, you can start tailoring your debt purchasing around your company's needs and find the most effective debt to purchase. A prospective third party agency should be able to provide you with liquidation rates on portfolios similar to what you may be planning on purchasing. Liquidation is the bottom line of a debt buyer's investment any time the debt is not purchased strictly for resale. Some simple math is with conservative numbers is the key to ensuring a profitable debt purchase.
SUMMARY AND ADDITIONAL INFORMATION - This document was created in July 2016 based on the experiences of an agency with 5+ years of operational experience. Some of the information in this document may vary based on your location, affiliates, and needs as an agency.
Please do your own research before making a debt purchase, this is intended to be used only as a general reference for individuals new to debt buying. Any information about organizations included in this document is based on information provided on the organizations' websites and personal experience with the organizations.
The Debt Buying and Debt Collection industries can be a very rewarding career if it's right for you. It is also a risky business to be in and has a somewhat negative connotation among some groups because of a few people/companies that have exploited the industries for personal gain or because of a general lack of understanding of the laws or regulations in place for consumer protection. Be mindful of who you deal with and always practice honest, legal and ethical business to help prevent any further negative stereotypes from being cast over this industry.
If you have any questions or need recommendations for reputable vendors or service providers, I would be happy to discuss them with anyone interested in getting a start in this industry. Anyone in the collection industry will gladly share the fact that it is a high-stress career, especially starting out, but it is very rewarding and I wouldn't want to do anything else. I hope that an aspiring debt buyer can find this article useful and make a more informed decision as a result of it.
IF YOU ARE PLANNING ON BUYING DEBT, SCROLL TO THE BOTTOM TO READ ABOUT HOT TO AVOID BEING TAKEN TAKEN ADVANTAGE OF OR RIPPED OFF (I get too many emails from people asking me to help them re-sell bad debt they purchased, and I can't help with that.)
EDIT:
First of all, thank you all so much for the support, I can not believe how much positive response this article has gotten from the community at large outside of Steemit. This article is a bit outdated and I plan on updating it soon.
As of today 5/21/2019 - I have just bought out my partner and started a fresh agency from scratch out of pocket and I've been documenting the process. It has been a very busy time for me but I don't have the heart to turn anybody away if this industry interests you. Please try to understand that I'm getting 3-4 inquiries a week from people who want consulting for their startups. I'm flattered but I am in WAY over my head with a small handful of people who I'm consulting for as well as my agency which is very much still in the startup phase once again.
To save us all some time, I have put together a few groups on Slack, I have made some educational videos and I do a once weekly live stream to do a Q&A (it was getting too hard to answer the same questions over and over again). If you want a 1 on 1 phone call, I'm willing to do it if you're willing to let me record the call to use for a podcast so that others can learn from it (not monetized, just educational). Email me at bob@acprocess.com if you'd like to chat or get further information about the community I've put together or the educational resources I have. I'm well aware that the internet is severely lacking on good information for aspiring debt buyers and agency owners.
If you are going to email me...
You can save us both a good amount of time by answering a few questions right away:
- Are you already in the industry or are you looking to get into it?
- How much experience do you have or what had gotten you interested?
- How far into the startup process are you?
- What are you looking to accomplish? (Start agency, Grow Agency, Learn to Buy Debt, Other Similar Industry, etc)
- Would you like an invite into a Slack group?
- Any other information that will help me to help you
- General contact information
BEFORE YOU BUY DEBT...
A few warnings I share with everybody. I think I can save a lot of time by getting this stuff out in the open. And if you are a debt broker, please don't get upset with me, just understand that I'm speaking in generalities...
I can't tell you how many people reach out to me saying 'I bought a portfolio from "Company A", "Company B" or "Company C", the information all seems to be fake, there seems to be no money in it! Can you help me sell it?'
No, I can not help you sell it. SOME (and I stress the work 'some') brokers will push bad files onto first time buyers. It happened to me many many years ago (multiple times if I'm being honest- it nearly bankrupt me at one point). Don't advertise online that you're looking to buy debt, don't advertise that you're inexperienced, don't ask questions that will show them how inexperienced you are and don't let someone push a file on you. There exist brokers who advertise that they sell debt online, and they make money from the $1,000-$3,000 portfolios that actual agencies won't buy. Unfortunately, this practice stops a lot of aspiring debt buyers from moving any further than the first purchase.
First of all, take your time. Don't buy debt impulsively. I am always willing to look at a masked file and share my thoughts with you before you buy. I am not a broker but I have a trusted network and I may be able to help point you in a better direction than a random google search would if you're serious about buying debt.
If you're a collector interested in opening an agency, feel free to reach out. I have a very diverse community of people at all different stages in the startup process and I can introduce you to some great networking opportunities. Don't pay for consulting... you learn by doing, and there are plenty of people who will consult you for free.
And then finally...
I am very busy. If I don't respond right away, keep in mind that I always respond, I may just need a day or 2. I will help direct you to some better resources. Be careful and don't get taken advantage of.
Best of luck and success to all of you.