How is the debt buying business profitable?
Collecting junk debt is quite profitable actually.
The important concept to grasp here is that the debt has been sold to another entity who is now going to attempt collection. Just because they purchased the debt at a discount does not mean they are going to try to pursue you for a lesser amount. They are after the full face value of the debt sometimes collecting interest and attorneys fees from the debtor as well. This is where it becomes extremely profitable to the debt buyer.
Remember how the XYZ Debt Buyer paid only $100,000 to ABC Bank for a portfolio of 1,000 accounts that were worth $2,000,000? All the debt buyer needs to do is make at least $100,000 to break even. Lets assume that over the next year XYZ Debt Buyer collects 10% of the total face value of the portfolio from the debtors. 10% of $2,000,000 is $200,000. The debt buyer has made back its $100,000 investment into the portfolio and made an additional $100,000 profit.
Suzi was contacted by XYZ Debt Buyer in an attempt to collect on that old charged off account from 2007. Its been a few years and Suzi had even forgotten about that debt. She had thrown away all the account statements from that account with ABC Bank. The Debt Buyer tells her that she owes $2,000. Suzi does remember owing something to ABC Bank and the $2,000 sounds about right to her so she really doesn’t question XYZ Debt Buyer. She is in a better financial situation now and would like to be a responsible consumer and take care of this debt. After all, she did owe it, right?
This is where being a responsible consumer can completely bite you in the ass.