A debt buyer is a company that purchases delinquent debts. The debt buyer is usually a professional debt collector, or a group of private investors. It buys bad debts for pennies on the dollar in the hopes of collecting more on the debts than what it paid.
If you are behind on your payments to a creditor, you may receive a notice that your creditor has sold your account to another company. That company is likely a debt buyer.
Typically, a debt buyer will buy a bundle of debts at one time for a price significantly less than the face amount of the debts. For example, assume that XYZ Company has 2,500 customers who are late paying their accounts, and the total value of those accounts is $500,000. XYZ Company can sell those accounts to a debt buyer for $25,000, or $.05 on the dollar.
When the debt buyer purchases the debt, it steps into the place of the original creditor. You must still pay the debt, even though you no longer owe the debt to the original creditor.
If you don’t pay, the debt buyer can do anything the original creditor could do to collect the debt, including suing you to collect the debt.
Debt collectors must follow the rules set out in the Fair Debt Collection Practices Act (“FDCPA”). However, the FDCPA does not apply to the original creditor. Because a debt buyer becomes the owner of the debt, there has been some confusion as to whether debt buyers are subject to the FDCPA.
Most courts have ruled that debt buyers must follow the same rules as debt collectors when they contact you about the debt. The FDCPA prohibits debt collectors from engaging in unfair, deceptive, and fraudulent behavior. It also sets forth rules about how the collector may communicate with you. For details, see The FDCPA: Illegal Debt Collection Practices.
The original creditor might send you a notice that it has sold your debt, but it's not required to notify you. Sometimes, your first indication that a debt buyer now owns your debt will be a collection notice from the debt buyer. The name of the debt buyer is likely to be unfamiliar to you, and this may lead to confusion.
If you receive a collection notice demanding payment by an entity whose name you do not recognize, you should immediately request proof from the entity that it owns the debt, that the debt belongs to you, and that you in fact owe it. This process, referred to as debt validation or debt verification, is one of the rights given to you by the FDCPA. To request validation, you must send the debt buyer a letter requesting validation of the debt. Once you do this, the debt buyer must provide documentation verifying the debt. In the case of a debt buyer, that documentation should include information about both the original debt and the debt buyer’s purchase of the debt. (Learn more about debt validation.)
If the debt buyer fails to provide verification, it cannot take any further action to collect the debt.
If you are not satisfied with the documentation you receive, it is wise to proceed with caution. Unfortunately, unscrupulous individuals will sometimes pose as debt buyers in the hopes of coercing people to pay debts that never existed. Legitimate debt buyers may not have sufficient documentation to prove that the debt is owed. If you are in doubt about whether you owe the debt, or whether the debt buyer can prove you owe the debt, you should consult with an attorney.