If you find yourself struggling with debt, it’s important to understand everything that may happen to your debt along the way so you can work through it all.
You may come across either a debt buyer or a debt collector, two services used by lenders (like banks) to move debts off their liability balance sheets. These two services sound similar but can perform different tasks.
Here, we explain a bit about debt buyers vs debt collectors, how each one will affect your finances, and how you can work toward a debt-free future.
When & Why Do Companies Sell Your Debt?
A borrower will likely only ever deal with the company they are borrowing from—so long as they make payments on their debt regularly and on time.
For example, someone who takes out a personal loan from a bank to pay for a home renovation project will likely only ever deal with that same bank when it comes to repaying the money.
However, if the borrower does not make timely payments, the debt may be sold to a third party. This is all in an effort for the original lender—in our example case the bank—to have less liability on their books. Those third parties are usually known as debt buyers and debt collectors.
Original lenders sell outstanding debts for pennies on the dollar to these companies. The collectors or buyers can then attempt to collect the debt from the debtor and keep the profit for themselves.
There is no real timetable for when debt may be sold or go into collections. It can depend on the state you live in, the lender’s policies, and the type of loan.
What Is a Debt Buyer?
A debt buyer is a company that purchases past-due accounts from a business like a bank. They typically purchase the debt for a small percentage of what is actually due to the original lender.
The amount a debt buyer pays for debt can vary, but is oftentimes just cents on the dollar .
For example, a debt buyer may only pay $100 for a $1,000 debt from the original lender. This means if the new debt buyer actually collects the debt they purchased they will make a $900 profit. Debt buyers can typically purchase older debt for even less because it’s less desirable debt and less likely to actually be collected in the future.
Debt buyers don’t typically do this as a one-off purchase, and instead are typically in the business of purchasing many delinquent debts at once to give them better odds of turning a profit. This strategy has the potential to be quite lucrative.
If, for example, a debt buyer purchases ten $1,000 debts at $100 apiece, the buyer needs just one person to pay their debt in order to break even, and just two out of the 10 people to pay their debts in order to turn a profit.
What Is a Debt Collector?
Debt collectors are also third-party companies, and collect debts on behalf of other companies. They can attempt to collect debts on behalf of the original lenders, or they can attempt to collect debts for debt buyers.
Debt buying companies may also function as a debt collection agency to collect the debts they purchased. But a debt-buying company can also assign debts to another third-party debt collecting company, paying it a portion of the profit when the debt is paid.
To get the debt paid, debt collectors will typically attempt to contact the original debtor via letters and phone calls, letting them know what is owed and attempting to convince them to repay the debt.
However, just changing a phone number or address doesn’t mean escaping debt collection. Collectors will often use the internet to find a person or even go as far as hiring a private investigator to find a person.
Debt collectors can also look into a person’s other financial information, such as their bank or brokerage accounts to assess if the person is theoretically able to repay their debts.
Collectors can also report a person’s delinquent debts to credit bureaus, potentially damaging the person’s credit score in the process.
A debt collector wholly relies on the debtor’s willingness to repay the debt and typically cannot seize paychecks. The only way a collector may be able to seize a paycheck or garnish wages is if there is a court order, known as a judgment , requiring the debtor to pay. However, this means the debt collector must first take the debtor to court within the debt’s statute of limitations and win the judgment for this to happen. There still could be other negative consequences, such as collectors reporting you to credit agencies, possibly affecting your credit score for some time to come.
Debt collectors often get a bad reputation for using aggressive tactics. The federal government introduced the Fair Debt Collection Practices Act protect people from predatory practices.
The law dictates certain reasonable limitations under which a debt collector can contact the debtor and, if the collection company violates the law, the debtor could bring a lawsuit against the company for damages.
Recommended: Understanding Debt Collection Laws as a Consumer
How to Avoid Collections and Pay Off Debt
Paying off all debt on time is the best way to avoid encountering either a debt buyer or a debt collector. But if you’ve found yourself in debt, don’t despair. Rather, take a bit of time to plot out the best method of repayment for your financial situation.
There are a number of different strategies to pay off debt, including creating a monthly budget to help track spending and see possible cutbacks to help pay off debts faster. The snowball method focuses on paying off debts in order of smallest to largest balances due while continuing to pay the minimum balance on each debt.
Another oft-used method is the avalanche method, which targets the debt with the highest interest rate first while continuing to make minimum payments on other debt balances.
In both the snowball and avalanche methods, after the first debt is paid off, the amount that was being paid on that debt is put toward the second debt on the list, and so on, thus helping to pay down each consecutive balance as fast as possible.
Another option to try is consolidating debts with a personal loan.
A debt consolidation loan is an unsecured personal loan that typically offers lower interest rates than credit card interest rates, and is intended to make those debts more affordable and easier to pay off. A big difference between credit card debt and personal loan debt is the types of debt: Credit card debt is revolving debt, while personal loan debt is installment debt.
SoFi personal loans offer low fixed rates and no fees, and make it possible to get out of credit card debt by having a payment end date. Personal loans can be used to pay off credit cards or other high-interest debt. Best of all, it takes just minutes to apply.
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