Encore and Portfolio Recovery Associates illegally attempted to collect debt that they knew, or should have known, may have been inaccurate or unenforceable. Specifically, the CFPB found that the companies:
Governmental regulations, particularly under the Consumer Financial Protection Bureau, tend to be stricter under Democratic administrations and less so under Republican ones. In addition, many debt purchasers have been consolidating or going out of business in recent years due to regulations and the nervousness of lenders to sell to the open market. Fast forward to today, and there are fewer purchasers, reducing competition, and an abundance of new tech collection firms to service accounts in a more efficient manner.
First, research the types of debts you want to buy. You may have experience with a specific kind of debt class or contact with a group looking to sell debts. Seek out other debt buyers, as well, to see what the market conditions are and to get an idea of pricing and value.
Just about any group or person that lends money has the ability to sell their debt; if they are interested, a price will need to be negotiated based on the market, the likelihood and time of collections, the type and age of debt, how long it has been actively worked, etc.
Before buying, reach out to a third-party collection agency to see what asset classes they specialize in and what they charge on an account. They may be able to give a clearer breakdown as to what they are able to collect on a specific debt type and age. Also, try to find out the following information:
Request that the seller send you a copy of the chain of title and sample media of the document the debtor has signed. The seller should also fill out a survey that outlines the general life of the debts after they entered collections.
EverChain Certification holds prestige and credibility with creditors and enables us to streamline deal flow with universal due diligence. Members of the EverChain Certified Debt Buyer Network have already undergone an advanced compliance review, which enables us to move through the deal process quickly and efficiently. Deals typically take half the time of a traditional sale from listing through closing, increasing the efficiency of the debt sales process and bringing buyers and sellers together quickly. Transactions may include warehouse files, one-time sales or forward flow arrangements for longer term partnerships between buyers and sellers.
Correction: August 19, 2014
An earlier version of this article misstated the value of a package of debt that McKellar and Associates Group purchased for 12 basis points. That comes out to about one-eighth of a penny on the dollar, not one-twelfth of a penny on the dollar.
This client update identifies the principal issues that private equity firms and their portfolio companies should consider and address with the help of counsel before any purchase of portfolio company debt by the sponsor or the portfolio company itself.
Accordingly, if a sponsor is considering a purchase of portfolio company debt, it should be sure to consult with fund counsel to make sure that it does so in a manner that both complies with its underlying fund documents and carefully considers any conflict issues.
Most portfolio company credit agreements still permit the borrower and its subsidiaries and affiliates (e.g., the sponsor or a debt fund affiliated with the sponsor) to purchase term loans of the company, whereas the purchase of revolving loans and commitments is still generally restricted and in many cases prohibited.[1]
Set forth below is a high-level overview of common terms in credit agreements that may affect the extent to which a sponsor or its portfolio company purchases/repurchases its debt, and some of the implications doing so can have under these instruments.
If the debt takes the form of a security such as senior notes issued under an indenture (in contrast to loans outstanding under a credit agreement), the private equity sponsor or portfolio company should consider the following:
The purchase of portfolio company debt at a discount may trigger taxable cancellation of debt (COD) income to the portfolio company and may cause the purchased debt to no longer be fungible with the remaining debt (which may impact the ability to resell the debt into the market). The precise tax consequences depend in part on whether the debt is repurchased by the portfolio company itself, by the private equity fund or by a related entity.
Similarly, if the debt will be purchased by a different fund (even if by an affiliated fund), the purchasing fund will need to obtain its own contractual management rights in order to qualify the investment as a good VCOC investment.
[1] However, some (typically mid-market) credit agreements continue to prohibit any purchase of loans by the borrower or its affiliates (including the sponsor). In these situations, the affiliate or the borrower may be able to enter into a participation with a lender. If this option is not available, an amendment (which may require a 100% lender vote) would be required to permit a debt purchase/repurchase.
Helping Communities Wipe Out Medical Debt
To help relieve the burden of medical debt on their residents as part of the recovery from the COVD-19 pandemic, communities across the country are using American Rescue Plan (ARP) funding to support efforts to buy and forgive medical debt. These communities work with partners to purchase medical debt portfolios from hospitals, health systems, and debt collection agencies and forgive the debt. Because medical debts are often available for purchase at pennies on the dollar, these efforts can translate into massive reductions in medical debt.
In the programs implemented to date, individuals qualify if they are residents of the given locality and have incomes below a certain threshold or have medical debt in excess of 5% of their annual household income. Individuals whose debt is cancelled are notified by mail and do not need to apply. Communities that have used ARP funds to forgive medical debt include:
New Data on Medical Debt in Collections
The report from the CFPB documents trends in medical debt in collections that are listed on credit reports, with the data extending through the first quarter of 2022. Key findings include:
Summary: On average, junk debt buyers purchase old debts for only 4% of the original amount, then they turn around and collect the full amount to make a huge profit. It's common for these debt accounts to have an expired statute of limitations. Armed with the right information, you can use SoloSuit to beat junk debt buyers in court.
In most cases, being sued for debt is a scary experience. What you might not know is that many attorneys representing debt buyers do not have the proper documentation to sue you. Summons and Complaints are often sent out to people who assume they either need to give up the money or hide, but this is not the case. You should always respond to a Summons and Complaint with a legal Answer, but you should also ask for proof of their ability to collect your debt.
In US courts of law, whoever is suing you for debt must prove that you signed a credit agreement or that you agreed to pay the debt in some way. Most junk debt buyers do not have this but assume you won't ask for the proof. That is why you need to know your rights and how to handle a court case with junk debt buyers.
If they decide to sell, they could do so to a private debt collector or a junk debt buyer. Junk debt buyers typically buy several accounts (portfolios) rather than individual accounts. And they are usually single-minded about getting you to pay.
The crazy thing about debt buying is that, on average, debt buyers purchase delinquent accounts for only 4Â per dollar of the original amount. In other words, if you have a debt of $1,000 with a credit card company, and it gets sold to a debt collection agency, they will likely purchase the debt for around $40. And when they turn around to collect the debt from you, they make a huge profit if you pay off the debt in full.
As inconvenient as it is to consumers, buying and selling junk debt is legal. That hasn't stopped the industry from having the most consumer complaints. Some feel that junk debt buying has completely altered the court systems in the country. Many courts are clogged with such cases, and default judgments are too common.
And sometimes, debt buyers use illegal means to make more money. The Fair Debt Collection Practices Act (FDCPA) sets forth guidelines designed to protect consumers from unfair debt collection practices. Know your rights to remain safe from illegal collection practices.
The culture of buying debt gained momentum in the late 1980s and early 1990s during the savings and loans crisis. During that time, the government auctioned off close to $500 billion in unpaid loans to the private sector. The private collectors profited from this venture; since then, the debt buying practice has only grown. Today, debt buying is a multi-billion dollar industry.
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