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How to Make Profits From Buying Bad Debts

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By Kevin A. Smythe

In order to turn a profit from buying bad debt, brokerage firms and other debt collection agencies must consider all the ramifications to reason out the most lucrative investment options. Often, older debt and charge offs lead to the greatest profit. Attempts to collect on fresh charge offs and debts are less successful for these purchasing agencies because the reasons behind the bad debt still follow the debtor.

For the most part, charge offs occur only when the debtor is truly unable to make payment to the issuing creditor. Illness, unemployment, and other extenuating circumstances lead to the debtor's inability to pay even a small portion of the debt owed. Even when the banks are willing to accept minimal payments as low as $0.15 on the dollar as a settlement, many debtors are unable to hold to the agreement.

The question arises, then, how a debt collection agency buying bad debt can expect to do any better than the issuing creditor. In short, the likelihood of success is quite low.

Fresh charge offs are typically connected to debtors in dire straits considering bankruptcy as an option, which negates their obligation to pay entirely. For investors buying bad debt, waiting until the charge offs are over a year old removes a great deal of this possibility.

At this point, the original creditor has likely reduced or completely stopped pursuit of bad debt, conserving their resources. Instead, a purchasing firm has a greater opportunity to purchase bad debt portfolios for a smaller percentage of the total debt, with the banks and creditors pleased to simply remove the bad debt from their finances.

At this point, the brokerage firm buying bad debt can more easily pursue debtors for a higher sum, having given the debtor time to recover from whatever occurrence or issue caused them to default on their payments in the first place. After a year to 18 months, the debtor most likely has ironed out a number of issues, including finding employment or recovering from illness, and will be able to pay a greater portion of the debt owed.

By contrast, newer charge offs turn little profit. During the early months of charge offs, banks are more likely to request a larger payment to sell their bad debt portfolios. In addition, debtors are unable to make payments. As the debt grows older, debtors often become tired of collection calls from the issuing creditor and other debt collection firms, which aids the brokerage firm in recovering funds on older accounts.

Though logic may state that a fresher debt is easier to pursue, the opposite is true. Buying older debt leads to greater profit margins for brokerage investors. The original creditor is more likely able to successfully collect on fresh charge offs, leaving older debt portfolios as a source of income for debt collectors.

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