What Gives Junk Debt Buyers the Right to Report to Credit Bureaus?

Companies who purchase bad or delinquent consumer debt from credit card companies acquire the same legal rights under the terms of the credit card agreement as the original card company. Since the junk debt buyer now owns the account, it has the status of any other creditor and can report account information to the various credit bureaus.

Third-Party Purchasers Of Bad Debt

Credit card companies will frequently sell their non-performing or delinquent credit card accounts to businesses that specialize in purchasing bad debt. Most of the delinquent accounts sold have aged considerably (past due status 180 days or greater). The card companies write off the bad debt and the company that acquires the account frequently pays only pennies on the dollar. It is important to note that although the third-party purchaser may have paid five cents on the dollar to acquire the account, the debtor is still liable for the full amount of the default balance.

Assignment of Contract Rights

Under principles of contract law, an assignor is one who transfers his rights and obligations under a contract to a third party who is called the assignee. The assignee stands in the shoes of the assignor and acquires all his rights and obligations under the contract. Since the assignee has ownership rights in the credit card account and is now entitled to receive payment from the debtor, it can report the credit status of the account to credit bureaus in much the same manner as the original creditor.

Card Agreement

When consumers open a new revolving credit account, they sign a card agreement with the bank or lending institution. These agreements are characterized as "adhesion contracts" because of the unequal bargaining power between the consumer and the card company. The terms and conditions of the credit card agreement can be onerous and are drafted in favor of the credit card company. The agreement as drafted is offered to the consumer on a take-it-or-leave-it basis.

Debtor's Consent Not Required

One of the standard provisions contained in most credit card agreements is a clause that allows the card company to assign or sell the account to a third party. The consumer agrees to the assignment and no notice to the consumer is required in the event the account is assigned to a third party.

Fair Credit Reporting Act (FCRA)

Credit reporting bureaus collect and maintain consumer credit information supplied by lenders. Under the provisions of the Fair Credit Reporting Act (FCRA), negative credit information about a consumer (delinquencies, late payments) can remain on the credit report for no more than 7 years. Bankruptcy information remains for 10 years. The 7-year FCRA clock commences on the date the delinquency was first reported by the original creditor; the clock does not get reset every time an account is assigned or sold to a bad-debt purchaser.