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Me…Buy Debt? Y O U M U S T B E J O K I N G by David G. Rosenberg, President, CEO and Founder of Unifund Why would someone sell bad debt and why would a collection law firm want to buy it? If you happen to look on eBay you find millions of items which have value to prospective buyers but the owners are “done with them.” The same is true in the debt purchasing marketplace. Essentially, buyers buy debt, or buy on eBay, when they have spotted a beneficial opportunity and sellers sell when their items are no longer of use to them, i.e., the paper reaches the end of its productive life for its current owner. There IS STILL VALUE in the item up for bid, just less value than when the item was brand new. Remember that you too can find those opportunities in the debt buying marketplace as you read the following overview of the benefits to both buyers and sellers. Debt 3 March/April 2007 14
Benefits to Sellers The sale of delinquent account receivable portfolios has attractions for both buyers and sellers. Sellers can be grouped into two general categories: original creditors and resellers. Original creditors typically benefit by increasing their cash flow in an immediate and effective way and most originators will admit that cash flow is the driving factor in the timing of the sale of their portfolios. Resellers typically, but not always, are collection agencies who resell debt once they are “done” collecting on the paper or decide to sell at the point when it is equally as cost effective to liquidate the portfolio as it is to perform further collection efforts (when accounting for factors such as time, staffing and other resources), essentially a “break-even” point. A third type of reseller also buys paper from originators and then segments those national portfolios into smaller files which are then attractive to regional, state and local buyers. Original creditors may choose to sell their accounts receivable, rather than collect them in-house or refer them to an agency because they believe that the sale of the debt reduces their legal liability. With the publicity generated by court cases in which creditors have been held liable for collection agency practices, today’s environment is one in which some creditors would rather terminate their legal connections to agencies and debtor accounts. Many creditors believe that selling their debt resolves any agency related legal liability because the buyer becomes the owner of the debt. Creditors may also sell their paper in order to maintain a good relationship with the debtor. Creditors can distance themselves from the collection process and hope to keep the debtor as a current or potential future customer. (A defaulted credit card customer may still be a debit card, banking or mortgage customer of a bank and the bank may not want to lose those relationships.) Creditors may also sell when they feel the market has priced their debt at an “indifference price,” the price at which it is a break-even to sell today verses expected collections on the accounts for the foreseeable future. Whether it is the original creditor or the fourth buyer of an account, a seller will sell when they feel they have extracted maximum value from their investment or when the paper no longer fits their business model. Benefits to Buyers Collection law firms can benefit substantially from purchasing accounts receivable. By utilizing a variety of collection methods, skilled collection personnel and a broad range of techniques, considerable profit can be made. Some particularly profitable debts include charged-off consumer credit card accounts, consumer loans, dishonored checks and judgments. Often, debt buyers can purchase these types of loans at pennies on the dollar and recover their investment and much more in about three years. This type of profit margin has made purchasing delinquent accounts receivables an attractive option for collection law firms. Today, collection organizations of all types are feeling increasing pressure to either consider buying or to increase the percentage of debt they buy verses contingency. By purchasing delinquent debt portfolios, buyers are able to take a longer view of the collection horizon verses the “sprinters mentality” needed in order to maximize collections during shorter placements. Also, collection law firms realize the value of combining contact collection strategies with legal collection strategies in order to achieve maximum portfolio yield by liquidating different parts of a portfolio using different methods. Often, firms are restricted by their clients as to the type of payment plans or terms that they can offer debtors. In contrast, when law firms own accounts, they can be more flexible in the terms they will accept and can pursue debts more enthusiastically without the time limitations set by original creditors. Firms that purchase debt are no longer subject to the normal administrative reporting and remitting expenses required in traditional third-party collections. Operationally, “placed accounts” drive a firm to meet and exceed a client’s service level agreements for activity, not necessarily meeting or exceeding results. Debt purchasing allows the buyer to invest disproportionately in the accounts with the highest potential return on investment over time. In fact, many legal collection firms are buying “litigationready” portfolios where the debtor account has an asset, typically a home. These accounts are placed immediately into a legal process with no “collection floor” time or effort and are viewed as more efficient to collect upon. Debt buying also gives a measure of comfort and insurance for those who augment their contingency business with a healthy dose of purchased debt. Call it an insurance policy against potentially other lost business because, with purchased debt you control the workflow, you don’t worry about getting “fired” or face a total recall of a placement and your profit margins should significantly improve as well. Besides, with purchased debt you get to keep all the money instead of sending most of it back to the client AND you can sell the portfolio once you feel you have extracted your maximum value. If you do decide to buy and sell… The buyer and seller should pursue the transaction realizing that there is some inherent risk for both parties. As a buyer you will want to mitigate the risks and create the environment for a mutually profitable experience. By not “rubbing it in” that either side is getting the better or worse end of the deal, both parties can create the professional dialogue, results and atmosphere which will lead to additional successful future transactions. David G. Rosenberg, Chairman and CEO, Founder The Unifund Group In 1986, David Rosenberg established The Unifund Group as one of the first companies to purchase underperforming and distressed consumer receivables. Over the past 20 years,The Unifund Group has developed proprietary tools and invested heavily in technology which allows it to evaluate, purchase and liquidate diverse portfolios of obligations from a broad variety of originating institutions and resellers. The companies which comprise The Unifund Group work under various forms of joint venture, participation and management agreements to maximize portfolio recoveries from both wholly-owned portfolios and portfolios owned by other institutions. Mr. Rosenberg has written many published articles regarding consumer debt, and he is the author of a manual issued by the American Collectors Association (ACA) entitled How to Buy Bad Debt. He is a frequent speaker at industry trade shows on the subject of buying and selling distressed consumer receivables. Debt 3 March/April 2007 15
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