Debt acquisition is when you purchase debt from a lender so that the indebted party owes you. For example, a client may borrow money from a bank to purchase a home. You can acquire this debt by paying the bank so that now this client owes money to you. While buying and selling mortgages and other debts is a common practice, if you have no experience with debt acquisition you should familiarize yourself with risks.
Asset Debt
Asset debt is debt that is backed by collateral. The most common type of asset debt is a mortgage. A borrower will take money from a bank to purchase real estate. This borrower then must repay the bank or risk losing the real estate. If you buy asset debt, you'll probably be buying mortgages. If the borrower is paying back the loan, you can earn money by keeping the interest the borrower has already agreed to pay. The original lender may have sold you this debt because she wants the money she lent the borrower back for other investments. You can also buy a mortgage that the borrower is not paying in the hopes of foreclosing on the borrower and keeping the property.
Non-Asset Debt
Non-asset debt is debt that is not guaranteed by any sort of collateral. This could be credit card debt or even a personal loan. You can buy non-asset debt that the borrower is slowly paying back so that you can make money with interest. You can also buy non-asset debt that the borrower is unable to pay back in full. Often, lenders will sell this non- or sub-performing debt for pennies on the dollar. For example, a borrower could owe $1,000 to a credit card company. If the credit card company doesn't think the borrower will make good on the loan, the bank might be willing to sell you this debt for only $200 to recover some money. Then you can try to negotiate with the borrower and make a profit by collecting $400. The borrower may be eager to negotiate with you since he'll be relieved of having to pay back the entire $1,000.
Risks
Buying debt can be very risky if you choose to buy sub-performing or non-performing debt. Sub- or non-performing debt is debt that the borrower is not paying back in full or at all. If you buy non-performing, asset-backed debt, you are hoping to foreclose on a borrower and own property. Before you become involved in this type of debt acquisition, you'll need to confirm that the property is worth more than you're paying for the debt. You'll also need to be aware of the costs and time associated with a foreclosure. If you are buying non-performing, non-asset debt, you risk losing your investment entirely if the borrower declares bankruptcy or just doesn't pay. It could be more expensive for you to recover the debt than the balance is worth.
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