Key Points

  • Debt buyers only pay a small percentage of the amount owed for charged-off debt.
  • A debt buyer can accept a low settlement on an account and still make money.
  • The Fair Debt Collections Practices Act (FDCPA) provides consumer protections against abusive, deceptive, and unfair debt collection practices.
The Lifecycle of Debt: Will This Debt Ever Go Away

This article is part 5 of a 5-part series discussing the lifecycle of debt.

Previous articles in the series include:

When you understand the debt life cycle, you realize that although it may be counterintuitive, delinquent debt can give you leverage to pay less than you owe. Risk-averse creditors seek to limit losses on accounts that cost more to collect than its worth. To achieve this, the company often packages debt in various stages of delinquency to sell to a debt buyer.

Here is how the sale of your debt impacts you:

Factors that Impact the Value of My Account?

The value of charged-off accounts typically ranges from 0.10 to 0.20 cents on the dollar, meaning if you owe a creditor $5,000, a debt buyer might pay $1,000 for the account. Creditors are interested in accepting the lower payment because they receive something for the bad debt and eliminate the account’s ongoing costs.

Several factors determine the value of an account, including the time since the last payment, the borrower’s state of residence, and that state’s rules. Some states have a longer statute of limitations, giving creditors more time to bring legal action to collect the debt. States also have different rules regarding wage garnishments, bank levies, and property liens used to collect on default judgments.

What Happens When A Creditor Sells My Account?

When a debt buyer purchases your account, the terms remain the same, but you make payments to the new account owner. The sale of your account does not impact your account payment history or the statute of limitations.

However, sold debt often results in errors on your credit file, which you can dispute. Because of the frequency of mistakes, you should retain any information you receive from both the original creditor and the debt buyer.

Debt buyers have less invested in your account, making them more willing to negotiate a lower payoff to settle the account.

What is My Legal Obligation to Repay?

Regardless of who owns the debt, you have a legal obligation to repay the amount owed. The law grants a company a set amount of time to bring legal action, called the statute of limitations. Once that time passes, the creditor (or debt buyer) may no longer sue to collect the debt. The seven-year time limit on reported payment histories also limits the impact of delinquent debt on your credit score.

Legal Protections That Govern the Industry

The FDCPA is the governing law for the debt collection industry and regulates what third-party debt collectors can and cannot do in collecting monies owed. The law establishes rules around when and how often a company can call, along with mandatory disclosures and communications. You have a host of rights created to prevent abusive, deceptive, and unfair debt collection practices.

The Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB) oversee industry compliance.

Final Thoughts

Loan defaults might be the last thing you expected as you began using credit cards or personal loans to bridge the gap between income and expenses. The need for debt relief often culminates when a final straw, or seemingly small event, causes an avalanche of financial troubles to pour upon you. Whether the crisis came from a change in employment, reduction in income, or family crisis, the result is the same—too much debt for your income.

The good news is that even if you find yourself with defaulted loans and charged-off accounts, your journey does not have to end in bankruptcy. As time passes, the value of your account declines significantly, allowing you to eliminate debt for substantially less than you owe.


  • Who owns my delinquent account?

    Your original lender can sell the account at any time. It is common for lenders to offload delinquent accounts to a debt buyer. If your account changes hands, you will receive a notice from both the original owner and the debt buyer. In the case of serious delinquencies, an account can change hands several times.

  • Will a debt buyer settle an account for less than I owe?

    Debt buyers only pay pennies on the dollar for delinquent debt, which creates a favorable situation for the new account owner to accept a lower payoff.

  • Why do lenders sell delinquent accounts?

    It costs a company money to keep an account on the books, even if there is no payment or activity on the account. Selling the debt is one way to recover some losses and eliminate maintenance costs on the account.