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.

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Debt Repayment Plans & Social Security Income

Social Security income is available to individuals who have either reached retirement age or are disabled. You may opt to enter into a debt repayment plan using your Social Security income, but are rarely legally obligated to do so.

Significance

Social Security provides a limited benefit to individuals who qualify based on the amount of money they contributed to Social Security in the past. If your Social Security benefits are your sole source of income, a debt repayment plan may prove difficult.

Fact

Although you may be legally obligated to repay your debts, a creditor cannot use a lawsuit to garnish your Social Security payments or remove them from your bank account via a bank levy unless the creditor is the federal government.

Benefits

Creditors will often offer very reasonable repayment plans to individuals who are living on Social Security due to the limited amount of income the debtor receives.

Misconceptions

If you are unable to meet the terms of a debt repayment plan using your Social Security benefits before you pass away, your creditors will discharge the debts. Your family members are not legally responsible for making payments in accordance with your repayment plan.

Warning

Creditors who cannot collect from you through a debt repayment plan, wage garnishment or bank levy may attempt to use a court judgment to place a lien on any property that you own.

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How to Settle Debt in Ohio

Settling your debts in Ohio can help you eliminate delinquent credit card bills and other unsecured accounts. Secured debts, such as auto loans and mortgages, cannot be resolved through debt settlement. Many people in Ohio consider debt settlement, according to Ohio Attorney General Richard Cordray. However, in 2010 Cordray warned that people should avoid for-profit debt settlement companies because of their high fees and often unethical behavior. Instead, settle your debts yourself.

Instructions

1

Prepare for debt settlement by seeking counseling from a nonprofit credit counselor in Ohio. Find a government-approved counselor by visiting the website of the U.S. Trustee Program (see Resources). Examples include Consumer Credit Counseling Service of the Midwest, with locations in Akron, Cleveland, Warren, Medina and other cities throughout the state.

2

Ask the counselor about the debt-settlement process. The SmartMoney website reports that, generally, accounts must be at least three months behind before creditors will agree to debt settlement.

3

Call your creditors. Tell them that you can no longer pay your account as agreed and would like to settle. SmartMoney reports that creditors will often settle for 20 to 75 percent of the balance, so make 20 percent your initial offer. Continue negotiations until you have an agreement you can afford.

4

Get the agreement in writing before paying. The agreement should include a stipulation that the account will be considered "settled for less than the full balance" once you pay.

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Credit Card Negotiation Strategies

Boldness to negotiate with your credit card companies can end in paying less interest each month, and in some cases, protect your credit score. Credit card terms vary according to card company. However, these terms are not written in stone, and many cardholders are able to acquire better terms by simply asking.

Better Interest Rate

Reading your credit card statement can reveal a high APR or interest rate. Paying excessive fees to possess a credit card increases how much your card company charges in interest each month, and this can slow down paying off the principal. Techniques or strategies to getting a better interest rate on credit cards first involve maintaining a good payment history with the company. This is evident by timely payments each month. One missed payment can jeopardize negotiations. Next, simply call the company and ask for a cheaper rate. Start negotiating and reveal plans to transfer your balance to another company if they don't budge on the rate. The ideal of losing your business can prompt card companies to oblige your request or meet someone in the middle.

Settling Debts

Overwhelming debts may produce thoughts of filing bankruptcy. But before risking a huge drop in your credit score and destroying your credit history, talk with your creditors to see if they will accept a debt settlement. Debt settlement is a practical alternative to bankruptcy; and some creditors are open to negotiations because filing bankruptcy can result in not receiving compensation or payment for debts. With a settlement, the creditor forgives a certain percentage of your debt and then reports the debt as satisfied on your credit file.

Request Everything in Writing

Credit card negotiations are often handled by an account representative or supervisor. Once you have reached a settlement agreement or another agreement with the card company, ask for the company to send a written copy of this agreement to you in the mail. Keep this agreement in your personal files in case the card company denies ever agreeing to new terms.

Use Professionals

Some card companies will not budge on terms of the original agreement. But this doesn't stop all negotiations. The card company may refuse to negotiate with cardholders, but they may work with a professional credit or debt counseling firm. Contact a debt/credit counseling firm and explain your situation. Express your objective for negotiating with credit card companies, such as lowering the interest rate or slashing monthly payment. If accepted into a program, counselors negotiate on your behalf to help you acquire better card terms.

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The Definition of Contingent Debt

Contingent debt is an unusual kind of debt that is dependent on uncertain future developments. In legal terms, the word "contingent" means something that might or might not happen. A contingent debt is not a definitive liability because it is based on the outcome of an event, such as a court verdict.

Contingent Debt

Debt is money borrowed with an expectation that it will be repaid in a specific period of time. In most cases, a document in the form of a loan note, a mortgage or a bond is proof of an existing debt and the terms under which it was given. While that kind of liability is certain, contingent debt is dependent on doubtful circumstances. If two corporations or individuals are locked in a legal dispute over debt, for instance, the payment of such liability is not certain because the outcome of a court case might not be predictable.

Contingent Liability

In accounting terms, things such as payable notes, interests, accounts and sales taxes payable are a clear indication an obligation to pay exists. Contingent debt existence is tentative. If, for instance, a company is embroiled in a dispute with the Internal Revenue Authority (IRS) over outstanding tax payments, it might not be easy to definitively predict the outcome. But then, how does a firm record such debt on its financial statements?

Guidelines

Just because it is not possible to foretell a debt that might or might not occur does not mean it should not be disclosed. Disclosure requirements exist. The debtor, or creditor, is supposed to take into account the probability of a contingent debt. Health insurance companies, for instance, usually have a rough idea of how much they will pay in liabilities unless there is a sudden outbreak of an epidemic. A reasonable estimate should be recorded in the accounts of the expected liabilities.

If Reasonably Possible

If it is determined that there is a slight possibility the the liability could actually be incurred, it should be indicated in notes and attached to financial statements. When it is clear there is no chance a contingent debt will happen, there is no need to record it.

Examples of Liabilities

Product warranties are contingent liabilities that are probable. Manufacturers can extrapolate from previous experiences to reasonably estimate liabilities. Such contingent debt is relatively easy to handle. But there are times when warranties can also result in a huge unforeseen debt--such as in the April 2010 case of Toyota vehicles having problems with break peddles. Before the problem, the company could not foresee it was going to spend hundreds of millions of dollars recalling and repairing defective break peddles in millions of Toyota vehicles and paying punitive penalties to authorities and in legal suits.

Put most concisely, a contingent debt is a debt that might not or might be, depending on future circumstances.

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Can Paychecks Be Garnished for the Collection of Consumer Debt?

Garnishment is when a creditor excercises its claim against the assets of a debtor that are in the possession of another party, like a paycheck. It differs from attachment, which is taking assets that the debtor already has in his possession. Following a legal process, different types of debts may be garnished from a paycheck, including child support, alimony and consumer debt.

Court Action

In any state that allows garnishment of wages for the collection of consumer debt, wages are usually garnished after the creditor wins a lawsuit for the amount of the debt. After the lawsuit, the court must issue an order allowing the creditor to take a portion of an employee's wages. The creditor presents this order to the employer which must comply with the court's decision and turn over the requested portion directly to the creditor.

Amount

Federal and state law defines how much of an employee's wages, based on disposable income, that a creditor may garnish for consumer debt. The law allows creditors to garnish the lesser of 25 percent of a person's disposable income or the amount of disposable income that exceeds 30 times the federal minimum wage. As of 2011, 30 times federal minimum wage is $217.50. If a person has less disposable income than $217.50 each week, garnishment for consumer debt is not permitted. If a person earns under $290.00 per week in disposable income, any amount over $217.50 may be garnished. If a person earns more than $290.00 in disposable income, 25 percent of the disposable income may be garnished.

Other Debts

Garnishment, at a much higher rate, is also allowed for child support and alimony payments. A person could lose up to 50 percent of his disposable income to garnishment for child support if he is also supporting a current spouse and child, and 60 percent if he is not, plus an additional 5 percent if he is past due by 12 weeks on payments. State and federal taxes, as well as Chapter 13 bankruptcy repayments, may also be garnished at different rates.

State Laws

Some states have their own laws concerning garnishment of wages. They may restrict the percentage allowed for garnishment to repay consumer debt or not allow garnishment for consumer debt at all. Pennsylvania and Texas, as well as North and South Carolina do not allow wage garnishment to pay consumer debts. All states allow garnishment for alimony or child support, or tax debt and student loans.

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How to Stop a Collection Agency From Freezing a Bank Account

If you fail to settle your debt with a collection agency, that agency may freeze your bank account and seize the available funds to cover your unpaid debt. When a collection agency or creditor freezes a bank account--also known as a bank levy or bank account garnishment--a consumer no longer has access to the money in that bank account. Fortunately, there is a way to avoid having your bank account frozen by a collection agency.

Instructions

1

Contact the collection agency to discuss your options. The agency may allow you to settle your past due debt for less than what you actually owe. You can also try to negotiate a reasonable payment plan. Fortunately, most collection agencies will allow consumers to make monthly payments.

2

Get the agreement in writing before submitting your first payment. Ask the collection agency representative to send you a formal confirmation letter stating the terms of your agreement. The letter should include the total amount due, along with the appropriate due dates for your payments.

3

Submit the appropriate payments to the collection agency. It is important that you make your scheduled payments on time. If you miss just one payment, the collection agency may decide to move forward with a lawsuit and freeze your bank account.

4

When your account is paid in full, you will no longer need to worry about the collection agency freezing the funds in your bank account. Don't forget to ask the collection agency to send you a letter stating your balance is paid in full, and you have a zero balance on your account.

5

Confirm that your account information is updated with the credit bureaus. Give the collection agency at least 30 days to update your account status with the credit bureaus. You will need to order a copy of your credit report from all three major credit bureaus: Equifax, TransUnion and Experian. You can obtain a free copy of your credit report by visiting AnnualCreditReport.com.

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