Buy Bad Debt

Written by Robert Mac
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If you buy bad debt--IOUs that companies don't think they'll ever be able to collect--you can try to recover the debt yourself. It's a growing industry, and many people do it, some of them very successfully. If you are a business owner or a merchant, though, it's probably easier to let a collection agency buy bad debt from you so you can run your business and not worry about deadbeat debtors.

Each year in the U.S., more than $70 billion is lost in uncollected debt; banks and merchants give up all hope that they will be able to collect what's owed to them, and they write off the debt. Collection agencies and other companies that buy bad debt then purchase it through auctions. Then they try their hand at getting the debtors to pay, sometimes successfully, sometimes not.

Let a Pro Buy Bad Debt from You

If you operate a business and have trouble chasing down debtors, a popular solution is to sell your bad debt to a collection agency. This differs slightly from accounts receivable financing, which is the sale of any debts owed to a company to another company, called a factor. The factor then collects payment from the debtors.

Bad debt is debt that is already written off and not expected to be collected. Since it's less likely to be recovered, it is usually bought for a low percentage of its face value--frequently pennies on the dollar. Companies often create a bad debt allowance as part of their operational expense because it's unlikely that they will recover those funds.

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