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Debt buyers, usually comprised of public or private companies, private equity firms, hedge fund investors, individuals, and even collection agencies, typically buy portfolios of charged off, delinquent debt from banks, hospitals, municipalities, telecom companies, or other credit granters. Debt buying has greatly increased in the last several years. This has resulted in increasing competition among debt buyers. It has also meant an increase in portfolio pricing. Its very probable that prices will continue to increase for another two years or so. Reasons include a decline in credit card charge-offs. In addition, since 2008, there has also been a reduction in credit card originations. This can mean smaller profit margins for bad debt buyers. These bought debt portfolios, which account for millions of dollars in past due, charged-off accounts, are, more often than not, large balance accounts. However, they’re usually acquired at some discount. Many debt buyers favor larger balance accounts because of the greater profit potential. Thinking similarly, most collection agencies also focus more of their collection activities on larger balance accounts. Similarly, most collection agencies also prefer and dedicate most of their collection resources on larger balance accounts. There are, however, some other options to take a look at. These can offer larger profit potential. They are also less competitive. For instance, -Bank Demand Deposit Accounts, these are overdrawn checking/ATM accounts (DDA) -Stafford Student Loans (govt loans for college or vocation school), and -Payday Loans Listed below are some advantages: Deeply Discounted Prices Banks and other institutions usually focus more of their internal collection efforts on larger balance accounts, because of the greater risk involved should these default. Because of limited in house collection personnel, banks don’t place much focus on smaller balance accounts. These can often be purchased at great discounts. Using third party collection agencies to collect these accounts greatly reduces internal expenses and minimizes overhead for debt buyers. The important thing, not to be overlooked, is using collection agencies that specialize in these smaller balance demand deposit accounts. Many collection agencies spend most of their efforts on large balance accounts, due to the potential for greater profits. Banks usually offer lower prices for small balance debt portfolios to make them more attractive to debt buyers. For collection agencies that specialize in collecting small balance DDA accounts, recovery rates average in the double digits. This means great opportunities for debt buyers. Investment returns of 50% or greater are not uncommon. Debtors Frequently Pay Off Smaller Balance Debts First There is sound reasoning for debt buyers to consider smaller balance accounts. Typical debtor behavior is to pay off smaller accounts first, as this gives them a sense of accomplishment. This seems a more manageable proposition than tackling larger balance accounts, which can feel overwhelming. After successfully paying down their small balance accounts, they then tackle the larger accounts, such as credit cards, medical debt, etc. For collection agencies with proficiency in collecting DDA accounts, this spells greater recovery results, as well as larger profits for bad debt buyers. Lower Competition At present, there appears to be little competition for debt buyers with respect to small balance DDA accounts, pay day loans, along with small balance student loans. Because most of the debt buying aim is on larger balance accounts, this may be a great time to look into this market. As a consequence of current bad overall economy, with prolonged high unemployment, and expanding past due debt, banks along with other companies are experiencing growing amounts of delinquencies, defaults and charge-offs of smaller balance accounts. Competition is expected to greatly increase, as more debt buyers and investors become more aware of the profits that can be made. Also, growing competition will certainly mean increased portfolio pricing, reducing the profit potential.
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