The Debt Buyer's Use of Credit Agreements to Collect on Credit Card Debts

Debt Buyer Definition

Debt buyers are a type of collection agency that purchases bad debts from original creditors, often for a small fraction of the value of the outstanding debt. The type of debt is irrelevant, but many debt buyers focus on credit card debt. Bad debt refers to accounts that the original creditor has already written off due to a belief that the debt is noncollectible. After purchasing the debt, debt buyers then attempt to collect the full amount, plus interest, from the alleged debtor.

The original creditor holds a credit agreement for every credit card account that is signed by the consumer. If the credit agreement contains a clause referencing the consumer's agreement to pay the debt to the creditor, the credit card debt may transferred to a debt collector for collection or sold to a debt buyer. Even if the clause exists in the credit agreement, debt collectors and debt buyers are not considered to be original creditors and are subject to the laws defined in the FDCPA.

As part of the collection process, debt buyers who purchase credit card debt have the right to report the debt to all three credit reporting agencies. Consumers who have stopped paying the original credit card creditor are likely to already have negative entries, such as a charge-off, on their credit report from the original creditor. Debt buyers report the credit card accounts as collections, thus creating an additional and separate negative entry on the consumer's credit report. Even if the consumer pays the debt buyer, the negative listing can remain in their credit file for seven years, unless the consumer negotiated the removal as part of the payoff.

Debt buyers must follow the same FDCPA rules as debt collectors. The rules relate to times and methods of contact, harassment, reporting and illegal claims. Consumers should also know their rights regarding the statute of limitations for debt collection in their state. Many debt buyers attempt to collect old debts, allowing the consumer time to recoup financially from the circumstances surrounding the original failure to pay. Debt buyers may not use the credit agreement to win a lawsuit on out-of-statute debts, if the consumer uses the statute of limitations as a defense in court.