Anyone have experience starting a debt purchasing/collecting business?

[Technofiend]

Hi everyone,

I am researching the debt purchasing/collecting business with a view to eventually starting my own firm.

Does anyone here have any experience in this area? If so I'd be very interested in hearing from you.

My intention is to become properly certified via gaining a consumer credit licence and then approach creditors/lenders with a view to purchasing their bad consumer debts.

From there I can either outsource the collection of the debt or I can collect it myself. I think outsourcing it would be the best thing to do first of all.

The main two areas I would have to work at are valuing the portfolios of loans and performing due diligence and then running analytics on the data I have on the debtors to ascertain the best collection strategy.

Again, these could perhaps be outsourced but at a cost.

I am in Edinburgh.

All replies appreciated. Thanks.

 

[businessfunding]

Out of interest, what has attracted you to this mature market?

I absolutely believe that there is a spare niche in every sector,but am struggling to see what your 'angle' will be against the established an professional players in the field?

Being clear on this will help provide relevant answers to your other questions.

 

[Swisaw]

This is not a properly legally regulated business, which has attracted some out of order operators. Before they come to your door, they claim they visited you several times but you were not at home. They charge you for each time and you can not do anything about it.

 

[businessfunding]

It's a very regulated business. There might be rogue operators who push the rules - it is always worth challenging the loan provider and involving the OFT

 

[Deleted member 138423]

but am struggling to see what your 'angle' will be against the established an professional players in the field?

Before they come to your door, they claim they visited you several times but you were not at home. They charge you for each time and you can not do anything about it.

This perhaps!!

 

[Technofiend]

Out of interest, what has attracted you to this mature market?

I absolutely believe that there is a spare niche in every sector,but am struggling to see what your 'angle' will be against the established an professional players in the field?

Being clear on this will help provide relevant answers to your other questions.

Thanks for responding.

What attracts me to this market is that I view it like any other market for assets, be those markets for shares, bonds, property etc.

This is a market for consumer debt and receivables.

It is entirely possible to venture into the aforementioned markets and discover undervalued assets that are trading for less than their intrinsic value. It takes a bit of work certainly but it is very much possible and over the long term I believe this investing strategy to be the most profitable one.

My view towards investing is that the more fear and uncertainty there is towards an asset the higher the chances are that the asset will be undervalued and therefore worth purchasing. Distressed consumer debts and delinquent receivables would certainly qualify as having lots of fear and uncertainty surrounding them.

As I do more research, and I may discover this to be wrong but I think it could be possible to develop relationships with smaller lenders and creditors and purchase their non-performing debt from them. The larger portfolios from mainstream banks would obviously be out of my reach but importantly, the larger debt purchasing firms would have no interest in purchasing the smaller portfolios of delinquent loans, hopefully leaving this segment of the market for smaller players.

I view a debt purchasing business as an investment business. You are investing in an asset and them working to realize its' intrinsic value.

 

[Technofiend]

This is not a properly legally regulated business, which has attracted some out of order operators. Before they come to your door, they claim they visited you several times but you were not at home. They charge you for each time and you can not do anything about it.

Yes this business is regulated and there are established firms.

If you start threatening debtors and sending thugs to their door, debt sellers will not want to do business with you, as there reputation will be threatened.

 

[businessfunding]

Thanks for responding.


I view a debt purchasing business as an investment business. You are investing in an asset and them working to realize its' intrinsic value.

Its good to see you have considered methodology and gone some way to selecting your niche which might work in a localised market - including doorstep collections (but not as described above)

It is quite some time since I did collections and much has changed (including regulation) however we used to categorise on a simple matrix:

Willing and able (surprisingly they do exist in the world of collections)
willing and unable
Unwilling and able
Unwilling and unable

I'm sure there are more complex algorithms available but that was a quite effective measure of value and recoverability

The biggest flaw in your plan is the involvement of people - who tend not to conform and who have a tendency to confound the best laid plans!

 

[Billmccallum]

no experience in debt collecting market, but the main issue that springs to mind....if the debt was easy to collect, the lender would not sell it on.... = more losses than wins.

 

[Technofiend]

no experience in debt collecting market, but the main issue that springs to mind....if the debt was easy to collect, the lender would not sell it on.... = more losses than wins.

True, but the prices paid for such debt is pennies in the pound.

I think the average paid in the UK recently for non-performing debt is 9.5p in the pound.

More losses than wins yes but then it would sometimes only take a few wins to breakeven.

And as you are buying the debt at such a deep discount you can always offer the debtor the chance to clear their debts at 25% of it's original value and still make money.

 

[arcon5]

Remember many of these would have been chased for years before selling them on for pennies in the pound and not acknowledged! Probably because the debtor is relying on the statue of limitations or simply doesn't care. Can give you a very small window to collect them in and if people start disputing the debt it certainly creates an administrative nightmare.

Although at pennies to the pound it certainly does leave quite a bit of leeway for writeoffs... With a nationwide team of self employed thugs collectors you could make some money from it - but I suspect managing the team of workers would in itself be a challenge, ensuring they don't put your license at risk

 

[Technofiend]

Remember many of these would have been chased for years before selling them on for pennies in the pound and not acknowledged! Probably because the debtor is relying on the statue of limitations or simply doesn't care. Can give you a very small window to collect them in and if people start disputing the debt it certainly creates an administrative nightmare.

Although at pennies to the pound it certainly does leave quite a bit of leeway for writeoffs... With a nationwide team of self employed thugs collectors you could make some money from it - but I suspect managing the team of workers would in itself be a challenge, ensuring they don't put your license at risk

All collections can be outsourced. I would be very hesitant to start employing bailiffs to collect credit card debts. In fact I doubt I'd go down that route.

 

[arcon5]

You can't employ bailiffs anyway without a county court judgement and they are court appointed. I'm talking about field agents whom visit properties, them in which collection agencies use - and in fact have no more powers than you or I, another problem with debts like this, I suspect the debtor know how it all works and knows the agent has no right of entry on their property - and in fact bailiffs can be refused entry anyway as they can only enter via peaceful means (with certain exceptions).

I'm thinking though it would be cheaper to employ commission only staff than say have to pay an agency to chase for example 500 accounts you've just purchased.

But remember, these debts have probably already been to the CC companies internal collections team, then to an external collection agency, then probably to another claiming to be solicitors and before you buy it it has probably been to many agencies and yielded the same results, nothing. So I have to ask, you buying them then asking another agency to collect it, how will you get any better results? If anything, probably loose credibility as they would have already been threatened with court action multiple times.

Also having been on the receiving end of such, I can certainly tell you the letters become laughable after a while.

I just think to make some money from these types of debts then you need to pull something new out if the bag

 

[pdhulme]

Chasing corporate debt is MUCH easier than chasing personal debt

 

[Technofiend]

Chasing corporate debt is MUCH easier than chasing personal debt

Really? Please elaborate.

Does commercial debt not require far more legal knowledge to pursue successfully?

 

[businessfunding]

Commercial; debt is more logical & rational - also much of it will be outside the scope of the CCA.

However the debt is seldom traded, most collection is done on a 'by results' basis - also actually turning up is essential.

 

[pdhulme]

Really? Please elaborate.

Does commercial debt not require far more legal knowledge to pursue successfully?

Easier to build a business around commercial debt. One good contact could deliver many cases to chase, and can grow business in to mediation/negotiating settlements.


Note: As full disclosure I own part of a debt collection agency in Spain Search Cobros Directos

 

[14Steve14]

A few years ago I ran a small local debt collection agency, and what you are suggesting didnt work for us. The debts were fasr too old and had been sold to many other debt collection agencies before we got them. The large companies purchase all the new debts and you are getting what they fail on. We used self employed collectors and some of them were the worse. They would use any tactic to try to collect money, and you had no control over them. They lied to the debtors and they lied to us.

The credit licence was a lot of work to get, but not that hard. Its just a series of paperwork.

We had far more sucess speaking to local businesses and getting their collection work. The debts were newer and most wanted to pay, it was just a case of finding out how they could pay. We even had people contact us who had court orders but the debts remained unpaid.

Its up to you which route you take, but there is money to be made in debt collection if you do it properly.

 

[Technofiend]

Thanks.

What sort of debts does your debt collection firm try and collect on?

How would you go about actually purchasing the debt instead of arranging to merely collect it?

 

[Technofiend]

A few years ago I ran a small local debt collection agency, and what you are suggesting didnt work for us. The debts were fasr too old and had been sold to many other debt collection agencies before we got them. The large companies purchase all the new debts and you are getting what they fail on. We used self employed collectors and some of them were the worse. They would use any tactic to try to collect money, and you had no control over them. They lied to the debtors and they lied to us.

The credit licence was a lot of work to get, but not that hard. Its just a series of paperwork.

We had far more sucess speaking to local businesses and getting their collection work. The debts were newer and most wanted to pay, it was just a case of finding out how they could pay. We even had people contact us who had court orders but the debts remained unpaid.

Its up to you which route you take, but there is money to be made in debt collection if you do it properly.

Thanks for the insight.

The more I look into this industry the more it seems as if success depends on having the right relationships with the right sellers in order to gain access to the best quality non-performing debt.

A new entrant to the market would have to cultivate relationships with smaller lenders/creditors to make any headway.

Are you able to elaborate on the due diligence process when purchasing debt?

Also, if you were buying the debt very cheaply(e.g. 3p in the pound) were you successful in offering debtors the chance to clear the debts for a fraction of their face value(e.g. 20p in the pound)?

Thanks again.

 

[Subbynet]

If I was buying a debt that cheaply I'd be asking questions why an already established company/debt collection firm are wishing to sell it on for such small sums.

(And at pennies in the pound you can guaranteed it's been sold a number of times already!)

My first thought would be they've tried everything under the sun to make them pay, and failed, and now the only way to extract that debt would be at a cost so prohibitive that little if any profit will be made. (Aka Court Action - Send people to address etc - all of which costs money)

I might be wrong, but that's how I see it.

So, how will you gain a tactical advantage over the others? What data can you use that will enable you to sort out the good debts from the trash?

If you blindly try collecting all those debts, I think you'll bankrupt yourself, and I for one don't buy the out-sourcing idea... They'll just do the same, sort the good from the bad, and your debt might never be chased.

If they had 50000 debts to be sold, and sold for pennies, say 3p each, that's what... £1,500? It's barely anything in the big scheme of things... Has huge warnings signs written all over it from my perspective!

Anyways, your mileage may differ, so good luck but its going to be hard work.

 

[Talay]

Remember many of these would have been chased for years before selling them on for pennies in the pound and not acknowledged! Probably because the debtor is relying on the statue of limitations or simply doesn't care. Can give you a very small window to collect them in and if people start disputing the debt it certainly creates an administrative nightmare.

Although at pennies to the pound it certainly does leave quite a bit of leeway for writeoffs... With a nationwide team of self employed thugs collectors you could make some money from it - but I suspect managing the team of workers would in itself be a challenge, ensuring they don't put your license at risk

You'd have thought so wouldn't you but the reality is stranger than fiction. My information comes from helping someone go through severe debt issues a couple of years ago.

Main bankers, the ones who know you have a house or such won't sell. They'll go through the courts themselves because they have more information than anyone else. They might sell post charging order but in my limited experience, they'll hold out for the longest time if they know you've decent equity in a property.

Loans also tended to go to charging order or at least CCJ. A couple of credit cards did as well. However, the vast majority of the debts never went to CCJ which I found utterly bewildering.

In this case, over £75k of credit card debt was never chased down to CCJ and this was across around 8 providers.

When I tried to unravel this mess, it appeared that most debts were churned a number of times, with each agency in turn only trying pitifully to collect before giving up and reselling.

 

[Talay]

Thanks for the insight.

The more I look into this industry the more it seems as if success depends on having the right relationships with the right sellers in order to gain access to the best quality non-performing debt.

A new entrant to the market would have to cultivate relationships with smaller lenders/creditors to make any headway.

Are you able to elaborate on the due diligence process when purchasing debt?

Also, if you were buying the debt very cheaply(e.g. 3p in the pound) were you successful in offering debtors the chance to clear the debts for a fraction of their face value(e.g. 20p in the pound)?

Thanks again.

I'd consider the "Road to Redemption" sort of strategy if the numbers stacked up.

Assuming folk want to get out of the hole they are in, then you're right, the pennies in the pound pay off is where you need to be but they aren't going to do it for the love of the bank or credit card company but they might be willing to do something if it could, in theory, straighten up their credit file a bit.

Trying to sell it as a pay off to a faceless corporation after they have already dumped repayments isn't a winning strategy IMHO.

 

[Technofiend]

If I was buying a debt that cheaply I'd be asking questions why an already established company/debt collection firm are wishing to sell it on for such small sums.

(And at pennies in the pound you can guaranteed it's been sold a number of times already!)

My first thought would be they've tried everything under the sun to make them pay, and failed, and now the only way to extract that debt would be at a cost so prohibitive that little if any profit will be made. (Aka Court Action - Send people to address etc - all of which costs money)

I might be wrong, but that's how I see it.

So, how will you gain a tactical advantage over the others? What data can you use that will enable you to sort out the good debts from the trash?

If you blindly try collecting all those debts, I think you'll bankrupt yourself, and I for one don't buy the out-sourcing idea... They'll just do the same, sort the good from the bad, and your debt might never be chased.

If they had 50000 debts to be sold, and sold for pennies, say 3p each, that's what... £1,500? It's barely anything in the big scheme of things... Has huge warnings signs written all over it from my perspective!

Anyways, your mileage may differ, so good luck but its going to be hard work.

I learned from Credit Today magazine that the average price of non-performing consumer debt in 2012 was sold for 9.5p in the pound.

Selling debt is an expensive, loss making process for creditors. But in most cases they are just aiming to clear it from their balance sheets so they can start making more loans. To many it is a cost of sales.

There is also the cost of tracing and collecting the debt. This is where I believe smart data analysis can come in, which is what the larger debt purchasing firms all utilize.

 

[Technofiend]

I'd consider the "Road to Redemption" sort of strategy if the numbers stacked up.

Assuming folk want to get out of the hole they are in, then you're right, the pennies in the pound pay off is where you need to be but they aren't going to do it for the love of the bank or credit card company but they might be willing to do something if it could, in theory, straighten up their credit file a bit.

Trying to sell it as a pay off to a faceless corporation after they have already dumped repayments isn't a winning strategy IMHO.

From a negotiating standpoint "Clear your debts and improve your credit profile for 1/5th the face value of your debt" is a good selling point IMO.

Also, as you stated and from my personal experience, most debt collection agencies don't seem to try that hard to collect from debtors, especially consumer debt.

They send a letter, and perhaps a few phone calls but their time is targeted on the few debtors they believe will lead to likely repayment.

 

[Talay]

I learned from Credit Today magazine that the average price of non-performing consumer debt in 2012 was sold for 9.5p in the pound.

Selling debt is an expensive, loss making process for creditors. But in most cases they are just aiming to clear it from their balance sheets so they can start making more loans. To many it is a cost of sales.

There is also the cost of tracing and collecting the debt. This is where I believe smart data analysis can come in, which is what the larger debt purchasing firms all utilize.

It is not unexpected, it is as you say, simply a cost and that is why there is no huge expense wasted on chasing it down. Far better to sell the recently non performing debt quickly and get a higher percentage than waste money and have to sell it later for a lot less.

When they are charging circa 23% to the general population and much higher to some, then a large proportion of this is to cover the bad debts.

Don't forget their up front income from sales though.

 

[Technofiend]

Loans also tended to go to charging order or at least CCJ. A couple of credit cards did as well. However, the vast majority of the debts never went to CCJ which I found utterly bewildering.

In this case, over £75k of credit card debt was never chased down to CCJ and this was across around 8 providers.

When I tried to unravel this mess, it appeared that most debts were churned a number of times, with each agency in turn only trying pitifully to collect before giving up and reselling.

This is a good example of a pricing inefficiency in a portfolio of consumer debt.

On the surface it looks like a debt that has had 4 debt agencies try and fail to collect is a losing proposition, but a little digging could show that not much effort was made to collect the debt or that the wrong approach was used to collect it.

Which brings me back to my original rationale for being interested in this line of business. In financial markets you win over the long term by identifying pricing inefficiencies in assets that are not realized by the market. In much the same way you succeed at purchasing consumer debt by identifying pricing inefficiencies in portfolios as in the above example.

Did you find anything else surprising or interesting when analyzing such portfolios?

Thanks again.

 

[Talay]

This is a good example of a pricing inefficiency in a portfolio of consumer debt.

On the surface it looks like a debt that has had 4 debt agencies try and fail to collect is a losing proposition, but a little digging could show that not much effort was made to collect the debt or that the wrong approach was used to collect it.

Which brings me back to my original rationale for being interested in this line of business. In financial markets you win over the long term by identifying pricing inefficiencies in assets that are not realized by the market. In much the same way you succeed at purchasing consumer debt by identifying pricing inefficiencies in portfolios as in the above example.

Did you find anything else surprising or interesting when analyzing such portfolios?

Thanks again.

I found the people working in these debt companies to be of the boiler room, spiv, barrow boy come chancer types with little intelligence and rather uncouth.

I suspect they are on a fairly low wage with (relatively) good commissions and like mobile phone retention staff, not above lying when it suits to get a sale and earn a commission.

As you say, if you were able to identify debt at an individual level, rather than aggregated, then you would be able to utilise more refined skills and lateral thought to bring about a higher percentage of resolutions than the traditional approach.

 

[BajarangSingh]

Hi Folks,

Its interesting to go through this piece with so many varied opinions and thoughts. I have been in the collection industry for the past 4 years and have worked closely with companies servicing contingent consumer debt,along with companies servicing purchased consumer debt.

I also agree that there are a lot of big established players in this highly regulated sector of business.Its getting difficult day by day to collect debt,especially when the debtors are becoming more and more aware of the ways to not pay their debts.

However for any small/new entrant there still is opportunity to make money if you become a bit innovative within the compliance framework.
Here is a real life example from a purchased consumer debt, this is based on the overall results of the portfolio which is unworkable now,due to it being statute barred.

Total accounts bought were 210K, in 2005.
Contact established on 140K accounts in the last 8 years.
Purchase value was 6P to Pound.
Monies paid by 80K accounts worth 75 millions.
Rest of the accounts with contact,but no payments were 60K. Imagine if the lender could have just closed these 60K accounts for just £100 each,he could have made an extra 6 millions.
However since most of the industry doesnt know the concept of IRR and NPV, they would find it difficult to close the accounts for lower value settlements.
The phone collectors are not trained on NPV or IRR calculations. In most of the cases, each account gets the similar treatment based on a similar logic.Which isnt correct, as you have to look at the portfolio from a financial perspective.
Here is the second aspect of those 60K accounts,which had contact but didnt pay anything...now most of complaints to the regulators came from this lot of customers. Which could have easily been avoided.

So the summary is that with a little bit of intelligence you stand a chance to get around 3X to 4X returns on your purchase value in 5 years time.

The returns will also depend on the type of data enhancement decisions which you will make. Analytic plays a major role as well. Creating a financial profile of your portfolio based on information available from credit reference bodies goes a long way in making informed decisions when negotiating.

Feel free to get in touch for any further analysis or input.

 

[Big G]

I agree that it is interesting to go through this thread and read so many different opinions.

I opened my Debt Collection Company in 2009 after 16 years experience running large debt collection departments in 2 firms of Solicitors.

I believe that it is extremely difficult to try and compete in the 'debt purchasing' market as your target customers in this field are mainly large banks who only sell their bad debts for pennies because they look to sell millions at a time. If you have that kind of money to start with then great but its a massive risk in my opinion.

Anyway, I am more interested in your experience in this industry and how you would go about collecting the debts yourself if you chose to do so. If not, how would go about choosing the correct company to outsource.?

As another poster has touched on above there are many people who enter this industry with no idea how to recover debts, no experience in it and no knowledge of the UK Debt Recovery Law / Practice Direction. This frustrates me a lot as we often hear really bad stories about people being ripped off / let down by people who call themselves our competitors but actually have no idea what they are doing and give the industry a bad name.

 

[daveymck]

Loans also tended to go to charging order or at least CCJ. A couple of credit cards did as well. However, the vast majority of the debts never went to CCJ which I found utterly bewildering.

In this case, over £75k of credit card debt was never chased down to CCJ and this was across around 8 providers.

When I tried to unravel this mess, it appeared that most debts were churned a number of times, with each agency in turn only trying pitifully to collect before giving up and reselling.

A lot of debts wouldn't make it through a CCJ hearing as the paperwork has been lost/done incorrectly certainly the older historical debt. Is the issue when the debt gets sold on any savvy debtor knows that you can hold up recovery with CCA and Sar requests and if the documentation isn't there or doesn't get passed on from the original debtor with correct notice of assignment then there's not a lot can be done to collect the debt.

Hence all the threatening and misleading tactics from a lot of the DCA's which tends to get worse as the debt moves down the food chain, guessing a lot of agencies cream off the can pay will pay and sell on the more difficult to collect debt hence a lot of the churning.

 

[Big G]

A lot of debts wouldn't make it through a CCJ hearing as the paperwork has been lost/done incorrectly certainly the older historical debt. Is the issue when the debt gets sold on any savvy debtor knows that you can hold up recovery with CCA and Sar requests and if the documentation isn't there or doesn't get passed on from the original debtor with correct notice of assignment then there's not a lot can be done to collect the debt.

I totally agree with this as I know of quite a few people that have done it.

Once you have delayed over the 6 year period with no legal proceedings being issued they are of course statute barred and unenforceable.

 

[jamesf85]

Can anyone give me more clarity on when a licence is required?

The OFT regulate consumer credit by requesting a CCA licence if recovering monies from a consumer. This comes at a cost of approx. £1500 for a LTD company.

If a DCA was set up just to collect monies on a business to business basis, for example trade invoice debt, would a licence be required?

many thanks

 

[Big G]

Yes you will need a licence but the regulatory body of the consumer credit licence is soon to change to the FCA (financial conduct authority).

I don't mean to be rude but I asked in an earlier post if you actually have any experience or knowledge of debt recovery / litigation, court proceedures, etc.??

If you don't I'm just curious as to what has led you to this industry.?

Thanks
Nick