Debt Purchase Agreement

A debt purchase agreement is a contract between a collection agency or a private debt collection law firm and a creditor in which the collection agency agrees to purchase delinquent or charged-off debts for a portion of the face value of the debt. The debt buyer may then repackage and resell parts of the purchased portfolio, collect the debt on its own, employ the services of another collection agency, or any combination of these alternatives.

History

Debt purchasing in the United States began as a result of the savings and loan crisis of the 1980s, when savings banks were closing at an alarming rate and the Federal Deposit Insurance Corporation received the assets of the bank to cover the expenses associated with repaying the closed bank's depositors. The FDIC and the Resolution Trust Corporation (RTC) then took control of the assets and made them available to organizations, institutions, and private investors willing to purchase these assets. The availability of these assets to the general public originated the debt buying industry.

Function

Debt purchase agreements allow companies to recover a portion of money from a potential loss situation. They also allow the purchaser to make a profit by reselling the debt package to another entity. The functionality of these agreements is a benefit because it creates an atmosphere of gain where there was once only loss -- making the best out of a bad situation.

Benefits

The benefits of entering into a debt purchase agreement are that you don't have any immediate clients to deal with, and the money that you make upon selling the portfolios is greater than what you spent to obtain them. The companies selling the bad debt want to cut their losses, thereby creating a good deal for you. You, in turn, can sell the debt package for a profit.

Considerations

Before you decide to participate in a debt purchase agreement, you should consider several things. What are your available budget and how much you are willing to invest for the purchase? What type of accounts are you willing to purchase --consumer debt, credit card, or judgments -- and is your company suited to deal with these accounts? What will your collection strategy be? You should consider the costs associated with working the portfolio such as man hours needed and time spent, and the execution of the legal process, which may become a vital part of your recovery campaign. Another important consideration is the location of the accounts you're buying, whether the accounts are local to you or in other states. Location is important because as you try to recover the money, you will discover out-of-state consumer collection to be more difficult. Another option is to resell the debt to a company that is local to that consumer.