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How Debt Buyers Acquire Bad Debts: Understanding the Process

Posted by Nathan DeLadurantey | Aug 02, 2023

In the world of finance and collections, debt buyers play a significant role in acquiring bad debts from original creditors and attempting to recover them. Bad debts are accounts that have been delinquent for an extended period, and original creditors may decide to sell them off to debt buyers to free up their resources and reduce risk. In this blog post, we will explore how debt buyers acquire bad debts and shed light on the process behind this practice. Attorney Nathan DeLadurantey regularly defends Wisconsin consumers in connection with debt buyers; he never represents debt buyers. 

  1. Debt Charge-Off and Decision to Sell:

When borrowers fail to make payments on their debts for an extended period, the original creditors often declare these accounts as bad debts or "charged-off" accounts. Charging off a debt doesn't mean that the borrower is no longer legally obligated to pay; rather, it's an accounting practice that reflects the creditor's acknowledgment that the likelihood of full repayment is low.

  1. Debt Buyer Companies:

Debt buyers are typically specialized companies or agencies that purchase bad debts from original creditors. These buyers range from small businesses to large corporations and operate within the legal framework of the Fair Debt Collection Practices Act (FDCPA) and other relevant state and federal regulations.

  1. Debt Portfolio Sales:

To minimize losses and remove non-performing assets from their balance sheets, original creditors often decide to sell their charged-off accounts in bulk to debt buyers. These sales are usually made as debt portfolios, which can include thousands of individual accounts.

  1. Valuation and Pricing:

Before purchasing a debt portfolio, debt buyers conduct due diligence to assess the value of the accounts and their potential for recovery. The pricing of the portfolio takes into account various factors, such as the age of the debts, the amount owed, the borrower's credit history, and the likelihood of successful collection.

  1. Legal and Regulatory Compliance:

Acquiring bad debts comes with responsibilities and obligations for the debt buyers. They must adhere to the FDCPA and other applicable laws and regulations that govern debt collection practices. Violations of these rules can lead to legal consequences and damage the reputation of the debt buyer.

  1. Debt Collection Efforts:

Once the debt buyer acquires the bad debts, they become the legal owner of the accounts. They can now initiate collection efforts to recover the owed amounts from the borrowers. These efforts can include sending letters, making phone calls, or even negotiating settlement options with the debtors.

  1. Challenges and Limitations:

Acquiring bad debts can be a risky venture for debt buyers. There is no guarantee that all debts will be collected successfully. Debtors may be facing financial hardships, may have declared bankruptcy, or may be difficult to locate. As a result, debt buyers must carefully assess the potential for recovery and strategize their collection efforts accordingly.


The process of how debt buyers acquire bad debts involves a complex interplay of financial decisions, legal considerations, and risk assessment. For original creditors, selling bad debts allows them to recoup some of their losses and focus on more productive areas of their business. On the other hand, debt buyers take on the challenge of recovering these debts and potentially profiting from successful collections. Understanding the mechanisms behind this process sheds light on the dynamics of the debt industry.

Attorney Nathan DeLadurantey offers free consultations to explain your legal rights in Wisconsin. Free consultations can be scheduled online. 

About the Author

Nathan DeLadurantey

Nathan DeLadurantey ATTORNEY [email protected] Nathan is a skilled consumer lawyer who handles cases and trials all over Wisconsin. Phone consultations are always free and welcomed. Nathan has helped clients receive large jury verdicts and settlements stemming from consumer law violations, and is ready and able to assist.


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