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How to buy debt

How to buy debt

If you have read my post “where to buy debts”, you now need to know how to buy debt.

Assuming that you are in contact with a seller, you must ask the right questions and have access to some documents. In other words you have to conduct your due diligence.

Due Diligence: “the detailed examination of financial records of the debts you intend to purchase, done before becoming involved in a business arrangement with the seller”.

The goal is to determine the “collectability” of the debt/portfolio and, consequently, the price you may offer.

Collectability depends on many factors such as:

The debt should be certain, liquid and payable.

This means that it is due for immediate payment, there is no dispute, litigation or claim from the debtor that could jeopardize collection, all documents proving the existence of the debt are available.

You may still decide to purchase disputed debts even though collection process is more uncertain but you must at least know what you are paying for before making any offer.

Type of documents availability.

For business debt, such documents are:

Invoices, agreements/contracts, Purchase Orders, proofs of delivery, reminders, dunning letters, etc

For home or student loans:

Promissory notes

For Credit cards, in-store credit, and lines of credit:

These are open ended accounts with written agreements

Ageing of the debt.

The oldest the debt is the hardest collection will be. In any case the debt should not be older than the Statute of Limitations (see below). These debts are called zombie debts

However, just because the debts have aged past the statute of limitations doesn’t mean that the debtor no longer owes money or that his credit rating cannot be impacted. It just means the creditor won’t get a judgment against the debtor, as long as the debtor comes to court prepared with proof that his debt is too old.

The Statutes of Limitations for Each State

Each state has its own statute of limitations on debt, and they vary depending on the type of debt. Usually, it is between three and six years, but it can be as high as 10 or 15 years. Before you purchase any debt, find out the debt statute of limitations for the State where the debtor is.

The debtor’s solvency

It is his financial ability to pay whole or at least part of the debt he owes.

This is in my opinion the most difficult part of the due diligence. Regarding both business and individual debtors, there is always a part of guess when addressing solvency.

You may of course invest into credit reports, business reports, solvency reports to gather information about the debtor but all these might not be up to date, and you may find yourself wasting time and money trying to shave an egg.

Buying a portfolio divides this risk between all the accounts. The likelihood that 100% of the debtors are insolvent is extremely low.

On the contrary, buying a single debt, even for a very good price, without solid information about the debtor’s solvency may easily turn into a disaster.

Debt with/without judgement

Some debt buyers are focused on purchasing judgements. This avoids collection process as it has already been done but enforcement job still remains to be done. Sometimes, enforcing a judgement is more complicated and hazardous than obtaining the judgement itself because of insolvency issues.

Keep in mind that judgements are usually sold at higher price though.

When contacting sellers on, always keep in mind all these points, use your common sense and your own approach to avoid bad investments.

Never make any offer before having reviewed all the documents disclosed by sellers.

You have to understand the reasons why a seller is reluctant to disclose proofs of his debt. Some sellers pretend to have fully documented debts but they do not. Some will ask you to sign an NDA before any other step.

Ready to buy your first portfolio now that you know how to buy debt?