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California Debt Blog: How cheap is that debt in the window?

February 7, 2008 by Jonathan Stein

Have you ever wondered how collection agencies can offer you 50%, 60% or more off of your debt and still make money? The answer: the price of buying a debt.

Hypothetically, assume you have a $1,000 debt. The collection agency may buy that debt for $100. The agency then offers you $500 to settle the account in full. You get a 50% reduction – they get a 500% profit. Not a bad deal.

Think these numbers are wrong? Well, Liz Pulliam Weston recently wrote about the cost of debt purchases. According to her:

  • Debts that are delinquent but not yet charged off by the original creditor can be purchased for up to 12 cents on the dollar.
  • Accounts that have recently been charged off: 7 to 9 cents on the dollar.
  • Accounts that are slightly older and on which a collection agency or two has already taken a whack: 1 to 3 cents on the dollar.
  • Years-old, out-of-statute debts: A penny or less.

Imagine how cheap these companies can buy your debt. And you wonder why they are making you deals? Of course, they have figured out that the cost of doing business includes getting sued once in a while for FDCPA violations, but with 500% profit and more, they don’t mind paying those costs!

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