Perhaps you have heard the tag lines, something like “make money from your kitchen table,” or “how to turn debt into income.” When you get into the details, you see information about buying debt for pennies on the dollar and turning it into bigger returns. The words are true and it is possible to make a lot of money in the collection business, but where people run into trouble is in trying to package it up into a neat little box that can be sold to anyone.

The collection industry isn’t for everyone. Without proper guidance and an understanding of the laws that govern each state and type of debt, one can end up losing money in this business and possibly cause some legal problems for themselves or the debtors. Another pitfall can be the initial investment, many debt buyers don’t want to invest heavily in their first foray into the industry. I don’t blame them, but with only a small percentage of accounts that actually pay one needs to buy a portfolio big enough to ensure that there is some return. I have seen many buyers only invest a small amount, only to find out that have only non-paying customers and they leave the business with a bad taste.

So how does the process start? To purchase debt initially, a buyer is going to have the best luck going through a broker or reseller. Believe it or not the banks and institutions have an interest in making sure their collection accounts are handled properly, bad press about collection tactics can hurt business image. It seems like a difficult rail to ride, but customer retention is always at the top of the issuer’s list and this usually means they will only sell to established and approved collection companies and attorneys. There are smaller issuers that are less stringent, but they are the exception rather than the rule.

Once a buyer has found a seller and a file is available, they will need to perform due diligence to determine the value of the portfolio. Since collection attorneys and collection companies operate differently, each will have a different value for the file. New buyers are best served by seeking the assistance of a more experienced professional in the industry to help with this valuation process, but once complete they should have a bid price to submit to the seller. Highest bidder takes the file and then the accounts are transferred to the buyer.

Now that the accounts are in buyer possession, there are several ways the file can be “worked.” Some buyers have an in-house counsel to process the accounts legally, others have a collection floor to distribute the accounts amongst collectors. A smaller buyer just starting out is usually better off finding either a collection attorney or company to place the debt with for a contingency fee or percentage of overall collections. If not already selected, the process can take a while as there are many companies and attorneys to choose from. One needs to make sure the outfit they place their debt with has an active interest in collecting the accounts for them and not just taking a passive role by sending a letter or two.

That is the process of buying debt in a nutshell, of course this article is a little too brief to go into every detail. If debt buying is done properly and the collection process is handled carefully there is good money to be made. I have helped move billions of dollars and millions of accounts over the last five years for banks, institutions and smaller debt sellers, so I hope the information provided here is helpful to anyone thinking of getting into this growing business. If you have any other questions, email me or sign up for the site where there is more information at your fingertips.