There are two main methods for purchasing defaulted credit card debt. You can buy it packaged, with many other low-rated debts in a junk bond or Collateralized Debt Obligation, or you can start your own debt collection company and buy defaulted credit card debts either individually or in a package. The former method has a high degree of risk, but doesn't take a significant amount of time and effort, while the latter requires starting and running your own business.
Investing in Junk Debt
Invest in junk bonds issued by credit card companies. "Junk" bonds are bonds with a very low credit rating. Credit card companies may issue many of their late or defaulted credit card debts as junk bonds to sell to investors as a means of potentially recouping some of their investment.
Consider purchasing a Collateralized Debt Obligation (CDO) issued by a credit card company. Collateralized Debt Obligations are usually not entirely constructed out of defaulted credit card debts, but instead are divided into different "tranches" of rated debt. Usually, the majority tranche of a CDO is made up of highly rated, currently performing debt, while the bottom 10 to 15 percent tranche is made up of late or defaulted debts.
Hold or trade out of your credit card junk bonds and CDOs depending on how you expect them to perform on the market. Unless the securities have been insured, if the securities default, you will likely lose your entire investment.
Starting a Collections Agency
Carefully review the Fair Debt Collection Practices Act and the Fair Credit Reporting Act. If you intend to operate a collections agency, you're obligated to follow those laws carefully. If you violate those laws in the process of your work, a debtor may be entitled to sue your company for damages.
Incorporate as a collections agency and start looking for clients. In some states, you will need to be licensed and bonded by an appropriate regulatory agency in order to collect on debts. In others, there are no particular requirements for running a collections agency. Save up some money before you start the business, as you will need to invest in debts, spend time collecting on them and potentially hire lawyers to take delinquent debtors to court.
Sign up for business accounts with the three major credit reporting bureaus, Transunion, Equifax and Experian. This will enable you to report the debts that you purchase. You are not legally required to report debts to the credit reporting agencies, but doing so will give you more leverage over the debtors you will be trying to collect from.
Contact credit card companies to inquire about collecting on defaulted credit card debts. You may need to make many sales calls before you can successfully purchase a debt from a credit card company. In most cases, companies sell their credit card debts for less than 10 percent of the total amount owed. If you can collect on the entire account, it can create high profits for your business.
Attempt to collect on any defaulted credit card debts that you have purchased by making phone calls, sending letters and offering to create a payment plan or settle the debts in return for updating the debtor's credit report accordingly and ceasing collection attempts.
- "MSN Money;" 'Zombie' debt is hard to kill; Liz Pulliam Weston; July 2006
- SeekingAlpha: In the Year 2010: Will CDOs Still Exist?
- Nasdaq: Junk Bonds - Everything You Need to Know
- Wall Street Journal: Junk Bonds Sell as Investors Get Bolder
- BusinessInfoGuide: Resources for Starting a Collections Agency
- ACAInternational: Starting and Managing a Collections Agency