What is a debt buyer and what should you do if one contacts you?

Young woman lying on floor, looking up debt buyers on her cellphoneImage: Young woman lying on floor, looking up debt buyers on her cellphone

In a Nutshell

Debt buyers purchase consumer debts for pennies on the dollar and then try to collect on them. Be sure to know your rights when dealing with debt buyers.
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If you have a severely past-due account, your creditor may give up trying to collect on the account and hire a third-party debt collection agency to pursue payment.

Or your delinquent debt could be sold to the highest bidder as part of a portfolio containing thousands of other bad debts. The debt buyer then tries to collect from the people who owe the debt and — like many debt collectors — can be aggressive about it.

If you find yourself dealing with a debt buyer trying to collect on a debt, knowing your rights — and understanding how debt buyers operate — can put you in a stronger position to advocate for yourself.

What is a debt buyer?

A debt buyer is a company that purchases consumer charge-offs (debts that have been written off by the original creditor), typically in bulk and at a deep discount. Debt buyers purchase all kinds of consumer debts, including credit card (the most common), auto loan, medical, mortgage and utilities debt. They may buy a debt from the original creditor or an intermediary, or from another debt buyer. The debt buyers then try to collect on the debts.

So why would anyone take on the risk of an unpaid debt? Debt buyers typically acquire these debts for an average of pennies on the dollar, then turn around and seek the full amount of the debt. They may even tack on additional costs for interest, penalties and attorney’s fees.

For example, a debt buyer might pay $250, or 5 cents on the dollar, for a debt with a face value of $5,000. If the debt buyer gets you to pay in full, they’d reap a profit of $4,750. And they could also charge you for court fees, if applicable, on top of that.

Debt buyers vs. debt collectors

Debt buyers and debt collectors both seek payment from consumers who are delinquent on their accounts. But while a debt collection agency typically tries to collect debts owed to other companies, debt buyers actually own the debt they’re trying to collect.

However, a company that buys debt may still hire a third-party debt collector to do the work of collecting on the debt.

Debt buyers vs. creditors

A few things make debt buyers different from creditors, including the accuracy of the information they have on the account. It’s important to know the difference between the info that a debt buyer may have access to versus what your creditor had.

  • Account information — When purchasing old debt, a debt buyer typically only receives an electronic file of data with basic information, like names and amounts owed. Documents like account statements usually aren’t included in the sale.
  • Old debt — Debts purchased by debt buyers may be old. Some may be past the statute of limitations (that’s the time limit allowed for a creditor to take legal action on a debt — usually three to six years, though laws vary by state and type of debt). And each time a debt is resold, the chance for errors regarding the age or other details about the debt can increase. Some consumers have reported being pursued for debt that’s more than 10 years old.

The lack of reliable information that a debt buyer may have about the debts can play a role in collection problems. Taking action on inaccurate or outdated information could lead the debt buyer to sue the wrong person, sue for the wrong amount or try to collect accounts that have already been paid.

How do debt buyers work?

When you miss too many payments — whether it’s for a credit card, auto loan, medical debt or other credit account — a creditor may stop trying to collect and list the account as a charge-off, which can stay on your credit reports for up to seven years.

And even though the creditor will report your account as a loss, you’re still responsible for paying what you owe, because a charge-off doesn’t forgive debt.

That’s when a debt buyer may try to contact you because it has bought the debt and is now trying to collect.

Debt buyers and the law

Debt buyers often turn to the courts in their efforts to collect on a debt. A 2020 report by the Pew Charitable Trusts found that Encore Capital Group and Portfolio Recovery Associates, two giants in the debt buying industry, saw their legal collections grow 184% and 220%, respectively, from 2008 to 2018.

These debt lawsuits frequently result in default judgments, meaning the debtor didn’t respond to the lawsuit. The judgments can include accrued interest and court fees that together can exceed the original amount owed.

What are your rights?

The Fair Debt Collection Practices Act prohibits debt collectors from using abusive or deceptive practices to collect debts. And that includes debt buyers.

Any debt collector who claims that you owe on a debt is required by law to give you certain information about the debt, including the name of the creditor and the amount owed. The debt collector must also tell you that you can dispute the debt.

If the debt collector can’t provide that information when you’re first contacted, they’re required to send you a written notice that includes that info within five days. If the debt collector can’t produce documentation of the debt, you could raise this as a defense if you are taken to court.

Check your calendar — and your state’s laws around debt collection —  to see if a statute of limitations applies to your debt. Again, the length of time that a creditor or debt collector is allowed to take action on a debt depends on state law and the kind of debt it is.

But beware: In some states, making a partial payment on your debt could restart the clock on the statute of limitations. And providing written acknowledgment of your debt could also get the clock ticking again.

What to know if a debt buyer contacts you

Understanding what debt buyers are and how they operate can help you craft the proper response if you are contacted by one.

If you have concerns about the debt, the amount cited or the company that has contacted you, you may want to find an attorney or a credit counseling agency for help. Getting help like legal representation for a debt claim could make it more likely that you’ll win your case or reach a settlement.

You can also dispute the debt if you don’t believe it’s yours. You have 30 days from the date you’re first contacted by a debt collector to dispute the debt in writing. The debt collector is then obligated to verify the debt before proceeding with any collections action.

Here are some initial steps to take if you’ve been contacted by a debt buyer who is seeking to collect on a debt.

Get contact info. Ask for the caller’s name and for the company’s name, address and phone number.

Verify the debt. First, make sure the debt is really yours. Remember, because debt buyers often resell debts, information about the debt can be lost or corrupted each time a debt is resold. It’s possible a debt buyer company could contact you about a debt that’s not yours, claim you owe a wrong amount, or pursue you for a debt you disputed, paid or settled a long time ago. Collectors must send you a written notice that tells you how much you owe, the creditor’s name and action to take if you don’t think you owe the money.

Check your credit reports. After the creditor charges off your debt and sends it to a debt buyer or debt collector, you should go over your credit reports to find out how the account has been reported to the credit bureaus. The Fair Credit Reporting Act entitles consumers to a free credit report from each of the three main consumer credit bureaus — Equifax, Experian and TransUnion — periodically.

Know the statute of limitations. Most states have a statute of limitations for credit card debt of three to six years, but it’s as long as 10 years in a few states. You may want to consult an attorney on the applicable law in your state.

Negotiate a settlement. You may have more leverage than you realize when dealing with a debt buyer. Remember, debt buyers may have paid pennies on the dollar for your debt, so they might still be making a profit even if you pay only a portion of what you owe. Think about what you’re willing to pay to settle the entire debt and negotiate for the rest to be forgiven.

Learn more about the credit impact of an account in collections

Next steps

If a debt buyer calls, you may be tempted to ignore it. But avoiding a debt buyer could lead to legal action against you. If the debt is legitimate but you can’t pay in full, you may be able to negotiate a settlement. And if it feels overwhelming to navigate the debt buying industry on your own, think about getting some help — you may qualify for free legal services through legal aid or legal clinics.

You also have the power to take action against unfair practices. If a debt buyer who’s contacted you is not providing you with the information you’re due or otherwise not following the rules, report it to your state’s attorney general, or submit a complaint to the CFPB online or by calling 1-855-411-2372.

To get back on track financially, you might consider working with a credit counseling agency, which can give you support to help manage your debt and organize your finances.

About the author: Brad Hanson is a senior editor at Credit Karma. His 30 years of experience in print and digital media includes work for the Los Angeles Times-Washington Post News Service, Trucks.com and Polyvore. Most recently before… Read more.