Buying Debt Portfolios: The Business Model & Due Diligence Guide
Buying Debt Portfolios: How the Secondary Debt Market Works
The Business Model
Debt buying is the acquisition of defaulted receivables from original creditors or other debt owners at a discount — typically 1-20 cents on the dollar depending on debt type, age, and documentation quality. The buyer becomes the legal owner of the debt and collects the full face value plus applicable interest. The spread between purchase price and recovery is the profit margin.
The secondary debt market is substantial — billions in face value change hands annually in the United States alone. Sellers include banks, credit card companies, healthcare providers, telecommunications companies, and any business with defaulted receivables they've been unable to collect internally.
Due Diligence
Chain of title. The most critical element. The buyer must verify an unbroken chain of ownership from the original creditor through every subsequent sale. Gaps in the chain of title make the debt unenforceable in court. Require a complete Bill of Sale and Assignment for each transfer in the chain.
Documentation quality. For each account in the portfolio: original signed contract or credit application, account statements showing the balance progression, charge-off statement, and records of any previous collection activity. Missing documentation reduces the debt's value because undocumented claims are difficult to litigate.
Debtor solvency. A portfolio of debts owed by insolvent, bankrupt, or deceased debtors has limited value regardless of documentation quality. Sample the portfolio to assess debtor viability — check for active bankruptcies, deceased debtors, and debtors with no identifiable assets or employment.
Statute of limitations. Debts past the applicable statute of limitations cannot be litigated. Time-barred debts can still be collected amicably, but the absence of litigation threat significantly reduces leverage and recovery rates. Price time-barred debts accordingly.
Pricing Models
Fresh charge-offs (0-6 months): 8-20 cents on the dollar. Highest recovery potential because debtors are recently active and contactable.
Older paper (6-24 months): 3-10 cents. Declining recovery probability as debtors become harder to locate and less responsive to collection efforts.
Aged paper (24+ months): 1-5 cents. Lowest recovery rates, highest risk of statute of limitations expiration, but potential for significant returns on individual high-value accounts.
Regulatory Requirements
Debt buyers must comply with the same regulations as collection agencies: FDCPA (for consumer debts), state licensing requirements, and industry-specific rules. The CFPB's Debt Collection Rule (Regulation F) imposes specific requirements on debt buyers regarding validation information and communication practices.
Buying debt portfolios is a financial arbitrage that rewards disciplined due diligence, efficient collection operations, and regulatory compliance. The spread between purchase price and recovery defines the business — and due diligence determines whether that spread is profitable.
