Many banks that have a significant portion of delinquencies in their credit card portfolios elect to take an accounting charge against these non-performing accounts by writing them off as uncollectible. Once an account has been charged off, the bank will either continue with collection activity or sell it to a third-party purchaser of bad debt. Even though the bank has characterized the debt as "uncollectible" for accounting purposes, a cardholder is still liable for the full amount of the default balance owed.
Purchasers of Bad Debt
Many companies specialize in purchasing, for pennies on the dollar, delinquent credit card accounts from banks that have charged off the debt as uncollectible. The price paid as a percent of the original default balance depends on the age of the delinquent accounts and the statistical likelihood of recovering a portion of the default balance owed. Since the debtor is liable for the full amount of the default balance, the return on investment to the third-party purchaser can be quite substantial. For example, if the purchaser paid 20 cents on the dollar for the delinquent account and eventually collects 50 percent of outstanding balance, the collector will have realized a 30 percent rate of return.
Rights of Third-Party Purchasers
Legally, the bad debt purchaser stands in the shoes of the bank that originally issued the credit card. They enjoy the same rights to payment as the bank pursuant to the terms and conditions of the original credit card agreement. As such, they cannot enlarge the obligations of the debtor by adding on charges not authorized by the original agreement. For example the third-party purchaser cannot add on additional collection charges, nor increase the interest rate on the default balance beyond that which was stipulated in the original credit card agreement.
Statute of Limitations Still Applies
The statute of limitations, which precludes a creditor from filing suit after the expiration of a specified period of time from the date of delinquency, applies to third-party purchasers of bad debt. The statute of limitations clock does not reset when the bad debt is sold, but rather begins on the date when the account first went into default with the bank.
Fair Credit Reporting Act (FCRA)
Adverse credit notations can remain on a consumer's credit report for no more than seven years plus 180 days from the date of the initial delinquency. Once the original seven-year period has expired, it is a violation of the FCRA for the bad debt purchaser to report the account as delinquent to credit bureaus.
Fair Debt Collections Practices Act (FDCPA)
The provisions of the FDCPA are equally applicable to third-party purchasers of bad debt. Bad debt purchasers are bound by the regulations that govern the extent and nature of creditor communications with a consumer debtor.
0 comments:
Post a Comment