When you borrow money from a company, you typically only deal with that company as long as you make your monthly payments on time. However, if you fall behind on your payments, your relationship with that lender is at stake. Companies typically have outlined the point in a customer’s delinquency where it’s more cost-effective to stop pursuing the delinquent debt and release it to a debt processing service. That’s where debt collectors and debt buyers come in.
Debt Collectors vs. Debt Buyers
Many people are familiar with debt collectors. They are third-party companies that collect debts on behalf of other companies. Debt buyers, on the other hand, are companies that purchase debts from other companies and then step in to collect those debts. Debt buyers may also be collection agencies who collect the debts they have purchased or they may assign these debts to another debt collector company. The primary difference between the two is the ownership status of the debts. Debt collectors are agents acting on behalf of the debt owners. Debt buyers, in contrast, become the principals (and not the agents) vis-à-vis the debts, and can then hire agents to help them collect it.
Paying Pennies for Your Debt
Debt buyers don’t pay very much for debts. They pay a few cents on the dollar for debts, even less for old debts. The less collectible a debt—i.e., debts that are several years old—the lower the debt is sold for since older debts are less likely to be paid. For example, a debt buyer may only pay $50 for a $1,000 debt. If you pay the debt in full, the debt buyer will have made $950 in profits from the debt. Debt buyers may purchase hundreds of delinquent debts giving them more opportunities to turn a profit. Even if only a fraction of the consumers pays these delinquent debts, the debt buyers can still make money since the debts are purchased for such a low amount.
Impact on Your Credit
Debt buyers can report your debt to one or all three of the major credit bureaus as a collection account. The three reporting agencies are Equifax, TransUnion, and Experian. Once the account is on your credit report, it will stay for the duration of the credit reporting period. Your credit score will likely be affected once the collection account is added to your credit report. Paying a debt buyer won’t remove the account from your credit report. However, your credit report will be updated to show that you’ve paid. Your credit score may improve over time if you’re timely on your other payments.
Statute of Limitations
Once you enter a payment agreement, you’ve renewed your obligation to the debt buyer. Making an agreement to pay—sometimes even just acknowledging the debt is yours—can restart the statute of limitations on a debt. The statute of limitations is the amount of time that a debt is legally enforceable. After the statute of limitations has passed, a company cannot use the court to sue you. Entering an agreement gives the debt buyer more time to sue you if you fall behind on the debts again.
Tax Liability on Canceled Debts
If you make a settlement with a debt collector or debt buyer to write off a portion of your debt, you must pay taxes on the written-off value. The amount of canceled debt is taxable and must be reported the same year the cancellation occurs. The creditor will use Form 1099-C to report this amount to the Internal Revenue Service. Canceled, discharged, or forgiven debt can come from foreclosure and repossession. If you return the property to the lender or abandon the property outright it still falls into this category, if a portion of the debt is cancelled. Some student loans avoid this liability.
How Do You Know If a Debt Has Been Sold?
Your original creditor isn’t required to let you know they’ve sold your debt to another company. You may not find out until you receive a letter from a company informing you that your debt has been purchased or acquired. If you receive a letter asking that you pay a debt, you have the right to ask for verification of the debt. You can request that the company send you documentation showing that you agreed to the original debt and that they now have the legal right to collect that debt from you. A company that cannot prove that you owe a debt does not have the right collect from you, which includes listing a debt on your credit report. The government controls the actions of debt collectors and debt buyers through the Fair Debt Collection Practices Act.
