Discounted Consumer Debt

Under U.S accountancy standards, when an outstanding personal loan from a bank has been left unserviced (i.e nothing paid back) for a period of six months or more, the bank in question is required to remove that loan from the ‘receivables’ part of its balance sheet. Some banks simply ‘sit’ on these underperforming loans, whilst others elect to sell onto experienced debt buyers.

The banks are naturally fearful of reputational risk in ‘chasing’ clients for payments themselves but are also cautious of only selling these underperforming loans onto debt buyers with a good reputation for their collections activity and behaviour.

Collections activity is tightly regulated, thus calls and emails to underlying debtors are controlled and debts have to be recovered in a professional and gentle manner.

The banks often sell the debts at a deep discount to face value (5c on a face value $1 typically) thus there is a strong business case for purchasing these loan portfolios at cheap prices and then gently approaching the underlying debtor with an offer of a settlement deal or affordable payment plan. Given current inflationary and interest rate pressures on consumers, more debt is coming to the market and at lower prices; sometimes 4c and 3c on the $dollar. Importantly individual debts are typically $1000 owing and under and portfolios are composed of tens, if not hundreds of thousands of individual loans, thus very diversified.

Once agreed, the debtor is deemed a ‘compliant’ debtor and has their credit score enhanced to reflect their settlement plan.