How Much Do Debt Collection Agencies Pay for Debt?

Ever wondered what happens to those stubborn unpaid bills that businesses can’t seem to collect? Well, it’s usually debt collection agencies that come to the rescue. They often swoop in when businesses have exhausted their “pretty please pay your bill” emails and awkward phone calls. They help bridge the gap between businesses desperate to collect what they’re owed and debtors who’ve gone MIA with their payments.

However, how collection agencies get their job done varies. At times, they work via hired collection agents, successfully collecting debts for a fee. Debt collection companies, on the other hand, may also decide to purchase people’s unpaid credit card bills and overdue loans.

Mind you, they don’t just buy the full amount of every Tom, Dick, and Harry’s debts. Rather, they analyze portfolios of different unpaid debts and decide on which ones are worth their time and money. That said, how much do these agencies actually pay for these debts? Let’s find out!

How Much Do Debt Collection Agencies Pay for Debt?

Let’s cut right to the chase. Debt collection agencies typically pay anywhere from 1 to 7 cents on the dollar for debt portfolios. Yes, you read that right. That $10,000 unpaid bill might sell for as little as $100 to $700. Shocking, right?

Well, when you factor in the element of desperate creditors wanting to get something, anything from the debt owed, it becomes more understandable. This is often the case when they’ve tried all they could think of but still failed. They may have even given up on ever recovering their money. Something is better than nothing, isn’t it?

However, there’s a method to this debt markdown, a familiar one at that. Take buying a used car, for example. The eventual selling price often depends on the age, condition, and even history of the car. Similarly, debt prices fluctuate based on several key factors that agencies scrutinize before making an offer.

Age is more than just a number when it comes to debt. Fresh debts, i.e., ones that are less than 6 months old, might fetch 7-10 cents on the dollar. However, the older the debt age, the closer the price falls to the “less than a penny” bracket.

The type of debt plays a huge role, too. Different debt types have different attached valuations. For instance, credit card debts attract lower fees than medical bills debts. Whereas debts like secured loans attract premium prices and serious figures.

Speaking of figures, collection agencies don’t just pull these numbers out of thin air. They use sophisticated algorithms and analysis tools. They look at historical collection rates for similar debt types, the geographic location of debtors, their average income, previous collection attempts and their outcomes, and other factors. All these factors, along with their operational costs and even the element of competition, play a huge role in how much they eventually bring to the table.

How Do Debt Collection Agencies Make Money?

How exactly do collection agencies boost their bottom line and make money without breaking any Federal Debt Collection Practices Act (FDCPA)? Here’s how:

Debt Purchasing

This is what we’ve been discussing so far. Original debtors can decide to sell debts to collection agencies. Remember those pennies-on-the-dollar prices we discussed? When an agency successfully buys a $10,000 debt for $500 and manages to collect even $3,000, they’ve made a tidy profit. The risk is higher, but so is the potential reward. After all, they get to keep everything they collect!

Contingency-Based Collections

Aside from buying debts, collection agencies can also partner with businesses to recover their debt on a commission arrangement. They typically charge 25-45% of whatever they manage to collect. If they recover $1,000, they might keep $300, sending $700 back to the original creditor. The percentage usually depends on factors like debt age, amount owed, and type. Usually, the tougher the case, the higher the fee.

Legal Services Revenue

Many collection agencies have in-house legal teams or partner with law firms. When they need to take legal action to collect debts, they can generate additional revenue through legal fees and court costs. While they can’t charge debtors illegal fees, legitimate legal expenses can be added to the debt balance, creating another revenue stream.

Portfolio Management and Resale

Smart collection agencies don’t just collect; they actively manage their debt portfolios like investment funds. They might hold onto debts for strategic periods, work them until they’re less profitable, then resell them to other agencies. Sometimes, agencies can make money by simply identifying valuable accounts within a portfolio, working the easy ones, and selling the remainder to other collectors who specialize in difficult-to-collect debts.

The world of debt collection agencies is far more fascinating and complex than most people realize.

Debt collectors and collection agencies do more than just chase down debtors. They have a more diversified job description and revenue stream. Simply put, these financial problem-solvers have transformed the challenging task of collecting unpaid debts into a sophisticated business model.

Are you an individual or company owner seeking to learn more about collection agencies or how the debt collection industry functions as a whole? Then, join Connection2Collections to gain exclusive access to several benefits. These include access to a global network of successful collection professionals, industry-leading collection strategies that get results, expert insights from veteran collectors, and more!

Have insights to share or questions about debt collection strategies? Drop your thoughts in the comments below. You can also read up more on what a debt collection agency is and key negotiation strategies they use to make debtors pay the debt owed.