When a brokerage firm or debt collection agency decides to acquire a portfolio of bad debt from a bank or other credit agency, it must determine the most lucrative investment options available. In many cases, buying bad debt can be more profitable if the debt is older because a greater percentage can be collected. Fresh debt is harder to collect because of the circumstances that led to a debtor not fulfilling the obligation to pay in the first place.
When a debtor allows a credit card to be charged off, it is typically because he or she is truly unable to make even a small payment to the credit agency. Due to unemployment, illness, or other extenuating circumstances, the issuer of the credit is unable to collect even a small percentage of the debt owed, sometimes not even collecting $0.15 on the dollar.
With the banks pursuing such a small percentage of the debt and having little success, how can an outside firm buying bad debt profit? Simply put, the odds are against them.
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.
By the time a debt is over a year old, the banks that originally issued credit are less likely to pursue that debt, not wanting to waste valuable time and resources on debt collection. Rather, they are willing to accept a smaller portion of the payment from a brokerage firm, just to get the debt off the books.
Also, because in 12-18 months after the charge off, a debtor has likely resolved whatever circumstances led to the charge off in the first place, a brokerage firm or debt collection agency buying bad debt will often be able to recover a larger sum. Typically, the debtor will have recovered from illness or found employment, making payment a more viable option for them.
In contrast, fresh charge offs are more difficult to turn into a profit. Banks are looking for a greater percentage in order to sell the bad debt portfolios, and debtors have fewer resources with which to repay their debt. Also, with the issuing creditor and possibly other agencies having been in pursuit of the debt for a greater amount of time makes the debtor more likely to want to end collection calls.
Logically speaking, it seems that newer, fresher debt would be easier to pursue and turn a larger profit. However, the issuing creditor may be able to achieve good results, but a brokerage firm buying bad debt will turn a greater profit by investing in older charge offs and debt portfolios.
When a debtor allows a credit card to be charged off, it is typically because he or she is truly unable to make even a small payment to the credit agency. Due to unemployment, illness, or other extenuating circumstances, the issuer of the credit is unable to collect even a small percentage of the debt owed, sometimes not even collecting $0.15 on the dollar.
With the banks pursuing such a small percentage of the debt and having little success, how can an outside firm buying bad debt profit? Simply put, the odds are against them.
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.
By the time a debt is over a year old, the banks that originally issued credit are less likely to pursue that debt, not wanting to waste valuable time and resources on debt collection. Rather, they are willing to accept a smaller portion of the payment from a brokerage firm, just to get the debt off the books.
Also, because in 12-18 months after the charge off, a debtor has likely resolved whatever circumstances led to the charge off in the first place, a brokerage firm or debt collection agency buying bad debt will often be able to recover a larger sum. Typically, the debtor will have recovered from illness or found employment, making payment a more viable option for them.
In contrast, fresh charge offs are more difficult to turn into a profit. Banks are looking for a greater percentage in order to sell the bad debt portfolios, and debtors have fewer resources with which to repay their debt. Also, with the issuing creditor and possibly other agencies having been in pursuit of the debt for a greater amount of time makes the debtor more likely to want to end collection calls.
Logically speaking, it seems that newer, fresher debt would be easier to pursue and turn a larger profit. However, the issuing creditor may be able to achieve good results, but a brokerage firm buying bad debt will turn a greater profit by investing in older charge offs and debt portfolios.
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