How to Purchase Bad Debts

A bad debt is a term used by lenders to classify debt which has gone severely delinquent and uncollected. In general when a lender such as a credit card company reconciles its books, the balance owed by a card holder is deemed an "asset". But when the debt becomes delinquent, over time it is considered a "liability" and written off as a "charge off". However, the card holder is still responsible for the balance of the bad debt.

Consult your secretary of state's website. Look up licensing requirements for debt collection agencies or firms. Most states require a bad-debt investor to be licensed as a collection firm. Follow the application process provided by the secretary of state.

Determine if a surety bond is necessary. In addition to licensing, a state may also require a collection agency to be bonded. The amount of the surety bond varies by state.

Establish a relationship with banks, gyms, car dealerships, property management firms, credit card companies, and any other lenders. Send out letters stating your collection agency is seeking to buy bad debts. Follow up by phoning the letter recipients and scheduling a meeting to evaluate and purchase the lender's bad debts.

Meet with the lender's representative and purchase bad debts with cash. Most bad debts are purchased for pennies on the dollar and are typically all-cash transactions.

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About the Author

Owen Richason grew up working in his family's small contracting business. He later became an outplacement consultant, then a retail business consultant. Richason is a former personal finance and business writer for "Tampa Bay Business and Financier." He now writes for various publications, websites and blogs.