Debt Portfolio Purchasing - An Investment Opportunity?
When debts remain outstanding for an unacceptable period beyond the agreed credit terms the owner of the debt, the creditor, will make attempts in a number of ways to collect the money owed to him. First step will be to write and call before handing the matter over to a first party and then a third party collections agency. He may even sell the debt to a collections agency for a discounted price in order to at least get some of the funds due and also to stop wasting time and other resources on the collection process. Having purchased the debt the third party collections agency will continue to pursue the debtor for a period before combining that bad debt with others into a debt portfolio. It is perhaps hard to understand where the value can be, but investors do buy debt portfolios and to meet that demand creditors and collections agencies will offer debt portfolios for sale.
This may not be the investment opportunity that will suit the inexperienced. Potential buyers do need to beware of the drawbacks. Anyone looking at debt portfolios for sale needs to have a strong understanding of the debt marketplace before handing over their money to buy debt portfolios. The debts in themselves are of course worthless, even though they will have been heavily discounted, but if they can be collected big returns on the initial investment can be made. Financial bodies such as banks and credit card companies are probably the largest of the debt portfolio sellers and a number of investment businesses have grown around these sales, setting up call centres and recruiting collectors in an attempt to not only recoup the purchase price but also to make a profit. Collection agencies have been accused, rightly or wrongly, of buying debt portfolios to improve their balance sheets. Accounting practice would show them as an asset even if the value is potential rather than real. Once someone buys a debt, they are no longer collecting the money from the debtor for the first party - they are making the collection for their own company and this has, allegedly caused problems that have given the industry a bad name. When third party collection agencies undertake collection work on behalf of clients, they have the client's trading reputation to protect and for this reason they will almost always stay within the law in their collection methods. Debt buyers, acting on their own behalf, appear to believe they have free rein to do whatever it takes to collect payments - including, allegedly, acting outside the regulations. Cases of harassment, bullying and even physical violence have been reported by debtors who have woken to find their debt sold to a debt portfolio buyer. The debt collection market is covered by the Trade Practices Act which actually prohibits the use of undue harassment, coercion or physical force when collecting debts but it is a sad fact that those who most need the protection they have under this Act are also those least likely to fully understand what their rights actually are. There is no doubt that debt has become big business. A full understanding of the way money works is required to fully appreciate how an unpaid debt can represent an investment opportunity but debt portfolio purchasing is just that. |