Buying credit card debt?

[Goughie]

Anyone know of any resources where I can investigate buying credit card debt in the UK? I've read some pretty interesting stats about the level of unsecured debt in the UK and think there may be a few quid to be made in buying up some debt. TIA.

[pgilc1]

How would that work?

I take it you have access to large cash reserves to do so. I cant imagine any credit company selling you small amounts.

Have you experience in the debt business?

[edb49]

Your best bet is to invest in a fund that has a high percentage of its assets in the CC debt market. You won't be able to buy it "retail"

[Fer]

Goughie said:

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Edited by Goughie on Saturday 26th July 18:25

A man of few words?

[Goughie]

pgilc1 said:

How would that work?

I take it you have access to large cash reserves to do so. I cant imagine any credit company selling you small amounts.

Have you experience in the debt business?

I am not looking to initially invest a lot and have no experience in the debt sector (hence the requirement for resources to research). I am keen to see if it can be done in the UK however, i.e. invest directly in a company that buys debt for a share of profit similar to the example shown below from the US. Hope this clarifies things.

As the UK has the highest level of personal unsecured indebtednes anywhere in the world, this subject at least warrants mare research in my opinion.

The Background:

Credit Card Companies (CCCs) have hundreds, sometimes thousands of credit card accounts that are closed out monthly due to consumers being unable to make credit card payments over a long term basis. At this point, CCCs don't have the resources to efficiently pursue these debtors to fulfill their debt obligations. CCCs get to a point where they cut their loses and sell this non-performing debt to collection agencies for literally PENNIES on the dollar. CCCs then assemble all of these accounts into a single portfolio and given a selling price where they are purchased as a lump some by Debt Purchasing Agencies.

Debt Purchasing Agencies (DPA) research the portfolio and all of its accounts. Depending on the portfolios demographics (i.e. Average Charge-Off date, Interest Charges, Location, etc) a value is assigned to the debt and the DPA will either pay the asking price or negotiate a lower price to purchase the portfolio.

Once a portfolio is obtained, the accounts are sorted out and distributed to collection agencies that perform all of the leg work to start collecting debt by placing phone calls to the debtors and negotiating a pay off value to write off the debt, ridding the debtor of their debt. Collection agencies are literally handed a file with all the debtors information and they receive a % of every dollar collected. The remainder of every dollar collected goes back to the DPA.

The INVESTMENT side:

Some DPAs allow a private sector of investors to get involved and have at the piece of pie. The DPA benefits because this gives them more purchasing power to buy more debt. Like most things, when you buy more bulk, you can negotiate even lower unit purchasing prices.

Now, let's say collections have been taking place for 6 months and the monthly collection numbers are dropping because the collection agency has exhausted its resources. Even though this particular collection agency has met their potential to collect on the debt, other collection agencies have different approaches to collecting and the remaining un-collected debt still has value to someone else.

As a result, the DPA that owns the debt can re-list the remaining debt for sale out on the market. Other DPAs and collection agencies can assess the value to the debt and purchase the remaining portfolio at a price, very similar to how the portfolio was first obtained. Since the actual debt collected is usually such a small percentage compared to the total debt available, the sale price is usually very close to the original purchase price.

Also, since this portfolio is technically owned by the original investors who put forth the capital to purchase the portfolio, they are entitled to the entire sale price.

There is no set standard for how the investments are handled by every DPA, but I will use the actual #'s from my DPA as an example.

Portfolio Collections
For every dollar of debt collected:

Collection Agencies ..................40%
The DPA .................................40% (contingency fee)
The Investor............................50%

Portfolio Sale

The Investor ..............100%*
The DPA.....................10% * (ROI > 20%)

DPA is entitled to 10% of the sale price if the Return on Investment (ROI) is greater than 20%. Basically this management fee is in place as motivation for the DPA to get the greatest purchase amount on the sale of the portfolio and ultimately the greatest return for the investor.

Once the sale is completed, the investor has made a full investment return and that particular investment has been completed.


Using numbers for further understanding:

-Let's say there is a non-performing debt portfolio from Bank of America that contains $25,000,000.00 worth of debt, being sold at $.013 on the dollar (yes, 1.3 pennies, VERY realistic)

-This means $325K needs to be raised from private investors to purchase $25M worth of debt.

-The portfolio is now broken down into individual accounts and distributed to several collection agencies around the country by the DPA and collections begin to take place.

-Fast forward 6 months and all collection agencies have reported a total collection of $650K

- Based on the investment structure, Investors get 50% of every dollar collected. This means the investors just made $325K back, or their original investment amount.

-The DPA now determines to put the portfolio back out on the market for another DPA to purchase. The portfolio originally had $25M worth of debt and now it has $25M minus the $650K collected. The Portfolio still has $24,350,000 worth of debt, nearly the same value it originally had 6 months prior. The portfolio can be sold at nearly the same price it was purchase

-Lets say the portfolio sold for $300,000. The investors, whom broke even on their investments with collections alone, just made $300K on top of their investment with the portfolio re-sale.

In Summary:

-$325,000 Investment broke even with collections
-$300,000 Profit was made with the sale

In 6 months, the investor made a 92% ROI, annualized that's a 184% ROI. (it was stated that the DPA gets 10% of the sale for a ROI > 20%, they would get $30K of the sale price.) 83% return after contingency fees.

So let's say you were one of the investors and contributed $10,000 towards this portfolio. In 6 months you would have turned your $10,000 into $18,307.69


Cliff Notes:

A portfolio is purchased from credit card companies for pennies on the dollar
A debt purchasing agency distributes the debt to collection agencies
Collection agencies collect on the debt and investors get 50% of every dollar collected
Portfolio is exhausted by Collection Agencies and resold
Investors get 100% of the sale

[Goughie]

Fer said:

Goughie said:

.

Edited by Goughie on Saturday 26th July 18:25

A man of few words?

My bad, a mix up quoting a previous post! Plenty to say now though!!!

[jamesuk28]

First thing you will need is a consumer credit licence.

[nigel79]

that sounds quite interesting, what with the current state of the economy and the credit crunch due to how much people have borrowed, i think it could prove to be quite an earner if done correctly.
im thinking about a carear change, so maybe that might be something to consider.

[KingRichard]

You say that once collections had been made, the portfolio could then be re-sold for close to it's purchase price, but in the first section you said the portfolio was valued on the likelyhood of making some collections from the outstanding book.

Now, if your debt collection agencies have exhausted the book, and have extracted all of the payments that are likely to be received, how has the book still got a value? That's assuming the subsequent buyer values the book of debt in the same way as you did on the initial purchase.

Also, how well greased does ones palms need to be in order to get first dibs on a debt book straight from the lender? I'd imagine the majority of the ones you've seen for 1.3% of outstanding debt have already been through this process at least once.

See what I mean? I'd be very wary of exactly what return you can make. I think your resale figure may be a tad over-egged. I don't know, but I suspect it may be... You need to look into some of these points.

Great idea though

Edited by KingRichard on Monday 28th July 10:19

[Goughie]

KingRichard said:

You say that once collections had been made, the portfolio could then be re-sold for close to it's purchase price, but in the first section you said the portfolio was valued on the likelyhood of making some collections from the outstanding book.

Now, if your debt collection agencies have exhausted the book, and have extracted all of the payments that are likely to be received, how has the book still got a value? That's assuming the subsequent buyer values the book of debt in the same way as you did on the initial purchase.

Also, how well greased does ones palms need to be in order to get first dibs on a debt book straight from the lender? I'd imagine the majority of the ones you've seen for 1.3% of outstanding debt have already been through this process at least once.

See what I mean? I'd be very wary of exactly what return you can make. I think your resale figure may be a tad over-egged. I don't know, but I suspect it may be... You need to look into some of these points.

Great idea though

Edited by KingRichard on Monday 28th July 10:19

I take your point re the resale value of the book. I think the point this guy was trying to make (off a US BMW site's financial forum) is that different collection agencies have different methods of collecting debt. So to one firm a particular type of customer may be easier to get money from than for another collection agency.

Like you say it sounds good in principle, but as you suggest more work is required here!

Edited by Goughie on Monday 28th July 19:54

Edited by Goughie on Monday 28th July 19:55

[Boosted LS1]

^ True, professional debtors will run you ragged whilst the bloke with a house, two kids and a wife mey be a softer touch. The nature of the debts may be significant.

[playerone]

There are lots and lots of companies in this market. The debt is only sold once all their normal avenues of collection are completely exhausted. Often you are handing it back to the same debt collection companies who tried to collect it in the first place!

Some debt is never going to be collected no matter what. You don't want to buy that stuff like that.