Buying Junk Debt Portfolios

Hi!

Does anyone know anything about buying junk debt portfolios? I was thinking of buying something for say $15K to $50K in face value at 7-10 cents on the dollar, and then sending it off to a collection agency, which works on a contingency-only basis.

Obviously the debt would be recent (so it adheres to statute of limitations and stuff) but I'm curious if anyone has ever done anything like this before. I understand the ethical implication to this and stuff but it is still very legal, so I'm wondering if anyone has messed around with this stuff before and what the risks are.

Thank you!

EDIT: Just to clarify, this would be things like Auto Debt, Credit Card Debt, Phone Bill Debt, Medical Debt etc.

Comments (29)

Dec 29, 2016

Edit: You answered my question when you fixed your original post

Dec 29, 2016

Well you would be bidding against collection agencies who wouldn't have your required IRR so they would be able to bid you higher, this is basically what many of them do as well as act as a collection house for debt holders.

Follow the shit your fellow monkeys say @shitWSOsays

Life is hard, it's even harder when you're stupid - John Wayne

    • 1
Dec 29, 2016
heister:

Well you would be bidding against collection agencies who wouldn't have your required IRR so they would be able to bid you higher, this is basically what many of them do as well as act as a collection house for debt holders.

Thanks heister. I actually managed to get in touch with a couple of the sellers and there is some good stuff out there with very reasonable pricing - very rarely exceeding 15 cents on the dollar (and most of these are fresh portfolios too that have never been collected on - granted there is very little ways to verify this information). They seem to also stay on the market for quite a bit, which leads me to believe that there is room for private individuals to compete and buy, especially portfolios with principle amounts less than $1mm. I just don't know what the success rate is on collecting.

Dec 29, 2016

So you're looking to step in the middle of a transaction between the holder of the debt and the collection agency? If the collection agency thought the pool of charge-offs was worth collecting on, wouldn't they just bid for the pool themselves? I could be wrong but I'm not seeing the logic in this deal.

Best Response
Dec 29, 2016

A lot of collection agencies are capital constrained. Unless they are collecting or selling existing positions (hence generating cash to recycle) or raising money externally (eg equity, debt, securitisation of some of their positions), they won't have funds to invest into new debts-for-collections.

I wouldn't trust an agency to do outsourced collections for me. No matter what they say, they won't try as hard on a success-based fee position as they would on a principal position. That means you'll mainly see success on debts that aren't that hard to collect (so likely aren't priced that low), a lot less on the harder debts that could still, if properly managed, deliver a worthwhile return.

    • 5
Dec 29, 2016
SSits:

A lot of collection agencies are capital constrained. Unless they are collecting or selling existing positions (hence generating cash to recycle) or raising money externally (eg equity, debt, securitisation of some of their positions), they won't have funds to invest into new debts-for-collections.

I wouldn't trust an agency to do outsourced collections for me. No matter what they say, they won't try as hard on a success-based fee position as they would on a principal position. That means you'll mainly see success on debts that aren't that hard to collect (so likely aren't priced that low), a lot less on the harder debts that could still, if properly managed, deliver a worthwhile return.

That's definitely helpful. I guess looking at this strictly on a multiple basis (and I know it's hard to spec. this), if I'm buying a portfolio at 10 cents on the dollar, with a 20% contingency, I would need approximately 12% of the face value back to break even, and perhaps 40%-60% for a satisfactory risk-adjusted return. Are these generally realistic targets to achieve?

Dec 29, 2016

Not if you have no skills to bring to the table. See my post below.

Dec 29, 2016
sabrina91:

EDIT: Just to clarify, this would be things like Auto Debt, Credit Card Debt, Phone Bill Debt, Medical Debt etc.

I don't want to get too efficient market hypothesis on you, but I think you'll struggle to find good deals unless you have some special collection skills you're bringing to this. If you're just dumb money, you'll likely generate an sub-efficient return. Or lose all your investment.

Why?

There are plenty of debt collection agencies already bidding for debts. The people selling those debts (banks, government agencies, etc) know how to bundle their assets up and sell them in large lots to eager collection agencies, who will bid against each other. There are intemediaries who will gather up and bundle debts into sellable bundles that will be bid for.

Anything you can get for sub-$1m is likely the unsellable shit left over after the reasonably efficient market has picked over what's available. If there are gems left in the pile, those will be gems which are "too hard" at first look, but value propositions when looked at harder. To extract that value, you need to be a smaller scale collector who has skill to extract that value (eg a persuasive personality, a relentless hounding of skip tracers, etc). People who already have skill sets like this (pay day lenders, bail bond providers) already sit in that space.

If you don't have those skills and are relying on third party collectors who won't try that hard to collect your "too hard" positions, you're likely to lose your investment.

Of course, perhaps I have too much faith in EMH. It's like the joke:

You: Look, a $50 note lying on the ground! Why don't you take it?
EMH proponent: It can't be a real $50. If it was, someone would have already picked it up.

    • 3
Dec 29, 2016
SSits:

sabrina91:EDIT: Just to clarify, this would be things like Auto Debt, Credit Card Debt, Phone Bill Debt, Medical Debt etc.

I don't want to get too efficient market hypothesis on you, but I think you'll struggle to find good deals unless you have some special collection skills you're bringing to this. If you're just dumb money, you'll likely generate an sub-efficient return. Or lose all your investment.

Why?

There are plenty of debt collection agencies already bidding for debts. The people selling those debts (banks, government agencies, etc) know how to bundle their assets up and sell them in large lots to eager collection agencies, who will bid against each other. There are intemediaries who will gather up and bundle debts into sellable bundles that will be bid for.

Anything you can get for sub-$1m is likely the unsellable shit left over after the reasonably efficient market has picked over what's available. If there are gems left in the pile, those will be gems which are "too hard" at first look, but value propositions when looked at harder. To extract that value, you need to be a smaller scale collector who has skill to extract that value (eg a persuasive personality, a relentless hounding of skip tracers, etc).

If you don't have those skills and are relying on third party collectors who won't try that hard to collect your "too hard" positions, you're likely to lose your investment.

Of course, perhaps I have too much faith in EMH. It's like the joke:

You: Look, a $50 note lying on the ground! Why don't you take it?EMH proponent: It can't be a real $50. If it was, someone would have already picked it up.

Got it! Yeah realistically speaking I don't have any useful skills in debt collection besides maybe Excel and SQL. I'd probably piss my pants if I saw my debtor in real life. Appreciate the reply, just needed to make sure I wasn't passing up on any golden geese here.

Dec 29, 2016

Some thoughts re: using third party collections agenices.

Let's say you buy a $1m book comprising 50 positions of average $20k size each.

From a third party collector's perspective, a 2% success commission on a $1,000,000 million book is $20k before tax. On each of the $20k positions, that's a $400 pre-tax commission if they can get that debt repaid.

Debt collection is a time intensive business, at the very least involving a lot of phone calls and threatening letters, with the option of in-person friendly chats, obtaining public records.

$20k revenue would not even cover the cost of employing a call centre jockey to call/mail the 50 debtors every week (with back office checking the paper work for each position to comply with state and Federal laws in collection activity).

An agency is not going to chase an individual debt very hard just to get $400 pre-tax commission, particularly when chasing debts is not really a pleasant job with motivations outside the monetary returns.

And recall that the positions you can get at a reasonable price are likely the harder collection jobs, not low hanging fruit that could easily be sold off. A $400 commission is not going to cover the cost of collection.

    • 3
Dec 29, 2016
SSits:

Some thoughts re: using third party collections agenices.

Let's say you buy a $1m book comprising 50 positions of average $20k size each.

From a third party collector's perspective, a 2% success commission on a $1,000,000 million book is $20k before tax. On each of the $20k positions, that's a $400 pre-tax commission if they can get that debt repaid.

Debt collection is a time intensive business, at the very least involving a lot of phone calls and threatening letters, with the option of in-person friendly chats, obtaining public records.

$20k revenue would not even cover the cost of employing a call centre jockey to call/mail the 50 debtors every week (with back office checking the paper work for each position to comply with state and Federal laws in collection activity).

An agency is not going to chase an individual debt very hard just to get $400 pre-tax commission, particularly when chasing debts is not really a pleasant job with motivations outside the monetary returns.

And recall that the positions you can get at a reasonable price are likely the harder collection jobs, not low hanging fruit that could easily be sold off. A $400 commission is not going to cover the cost of collection.

Your math makes sense, but from what I understand, the commissions that are market are typically 20% of the amount collected or 40% if attorneys are involved. If it's the latter, they typically sue the debtor and 90% of the time, they don't even show up = you win + potential to garnish wages.

Secondly, from what I've seen, the median outstanding balance isn't an unpayable amount on things like phone bills and CC debt. It's typically between $300 to $1500 per person.

Dec 29, 2016

20 - 40% comms makes much more sense than the 2% I used, which is more like a standard banking intermediary commission.

Dec 29, 2016

I buy a lot of debt, however I buy specific types of debt that have recourse. Most consumer debt has little recourse, however if you buy for example tax debt, corporate debt, etc you can get asset recourse if the debt isn't repaid.

Follow the shit your fellow monkeys say @shitWSOsays

Life is hard, it's even harder when you're stupid - John Wayne

Dec 29, 2016
heister:

I buy a lot of debt, however I buy specific types of debt that have recourse. Most consumer debt has little recourse, however if you buy for example tax debt, corporate debt, etc you can get asset recourse if the debt isn't repaid.

Are you talking about things like buying real estate tax liens from counties?

Dec 29, 2016

Yes, as well as mechanics liens, I buy defaulting loans that local banks are holding on their books as well as other types of junk debt. I stay away from consumer debt despite the huge potential returns as it is way too much work.

Follow the shit your fellow monkeys say @shitWSOsays

Life is hard, it's even harder when you're stupid - John Wayne

Dec 30, 2016

I can help you. I'm an industry expert in buying defaulted debts.

Jeffery A. Hartman Loan Sale Advisor, Fitzgerald Advisors, LLC
Email: [email protected]
Website: www.fitzgeraldadvisors.com
Linkedin: https://www.linkedin.com/in/hartman1

    • 1
Dec 30, 2016
Jeffery-Hartman:

I can help you. I'm an industry expert in buying defaulted debts.

Let me PM you Jeffery!

Dec 30, 2016

I think I ran out of banana's to reply back :) haha....look me up on LinkedIn Jeffery Hartman Fitzgerald Advisors

Jeffery A. Hartman Loan Sale Advisor, Fitzgerald Advisors, LLC
Email: [email protected]
Website: www.fitzgeraldadvisors.com
Linkedin: https://www.linkedin.com/in/hartman1

Aug 25, 2017

Yes indeed, very lucrative, basically, it has to be in you, to do collections, however very lucrative, ive bought portfolios for over 6 years, now I own my home, 2 cars, so its very lucrative if your really interested. contact or 404-246-0896 for more info: !!!!!!!!!!!!!!!!!! James

Jul 3, 2019

Hey james I would love to learn the business how can I get in touch with you ? I know that post is couple years old not to sure if your number is the same.

Aug 25, 2017

GREAT

Feb 12, 2018

We are an outsourcing BPO. We are currently having medical leads generation and solar lead generation process. We want to start collection process as well in US. Can anyone help me out and tell from where can we get data on cheap rates.

Feb 12, 2018
Ron-Harbour:

We are an outsourcing BPO. We are currently having medical leads generation and solar lead generation process. We want to start collection process as well in US. Can anyone help me out and tell from where can we get data on cheap rates.

Check ACA International and NACM.

Feb 23, 2018

Is there any reference if i want to get Collection agency licence for different states? I am not a resident of USA, but have registered company in USA. A licence on company name so that i can start my inhouse collection setup

Jul 3, 2019
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