The National List of Attorneys - Debt Buying Basics
The article below was published in The National List of Attorneys
May 2010 Developing A Collection Practice booklet
To Buy or Not to Buy: That is the Question
By: Charles Litow
Litow Law Office
This article is for the attorney who has never bought debt or has extremely limited experience. My hope is to answer your basic questions and to show you why debt buying can be a good thing if the circumstances allow.Before I discuss the process of determining if debt buying is right for you, the benefits of debt buying should hopefully be rather obvious. As an attorney, you have the training and knowledge to handle the files. Further, with debt buying you have the “ideal” client. You set whatever standards you need to set. Virtually any issue that can be problematic with your regular clients from reporting and compliance to the demands for performance can be eliminated through buying debt. While there are attorneys who have literally left their contingency practices behind them for debt buying, debt buying can only make sense if it can return a profit and not take away from your other clients in the foreseeable future.
The first step in the process in determining if you want to stick your toe into the debt buying arena is your strategy and does your state support it. If you plan to litigate the accounts, you need to look at your own state’s legislative scheme and legal system. Not every state, such as North Carolina’s legislative scheme, will allow for success in buying debt. Other states may make it cost prohibitive, while other states may have active consumer bars that target debt buyers. Your rules of procedure or a statute of limitation may enhance or hinder debt buying litigation. In short, whether an attorney should buy debt in today’s market place depends on many factors including how the debtors are viewed by the regulatory forces where the debtor resides. Never try to collect in any state before you know the rules behind collection activity in that particular state.
If you believe the marketplace will allow you to achieve some positive and acceptable return, you will then need to find a seller. While there are many sellers in the market, there are only a few ways to find reputable sellers and most are in fact reputable. Obviously talking with other attorneys or law lists will be your best sources of reliable information. You can meet a seller at trade show as well. Based on my own personal experience, try and buy from someone you have met or someone who comes highly recommended.
After locating some prospective sellers, be sure and ask them for references. Focus in on those references that handle the paper the same way you do. For example, an agency reference is not much good if they do not litigate the paper. Ask the references not only about liquidation, but about the ability of the seller to support the sale. Three important examples of support items would include providing original creditor media, direct pays and handling claims that need to be returned for bankruptcy, fraud or other reasons that made the claim unenforceable at the time of sale.
The next step is to find a file and to conduct your due diligence. Be sure to review the chain of title to see who touched the paper. If you are uncertain how the paper was handled by each person in the chain, ask. Obviously, the more times it’s been touched the more it’s been worked. I would not rely on surveys or any statements used to make the sale unless you are extremely comfortable with your seller. Rather try to independently verify as much as you can. In the file itself your focus should be on the date of last payment, the balance involved, how those balances liquidate in your jurisdiction and any other factors which you know would play an important part in liquidating the accounts. Determine if original creditor media comes with the purchase and if so the cost for each page. Be sure and see if you can get an affidavit from the original creditor, particularly if you need it.
For new buyers, pricing the product will be the most difficult element. Looking at how your debt buyers’ clients liquidate will not be an effective pricing tool. In the beginning you will need to make a leap of faith. Don’t be discouraged by one bad portfolio. Small portfolios are more susceptible to wild fluctuations in performance. You should stick to one or two sellers and work the relationship so the pricing element and your lack of sophistication does not become your downfall. Overtime, you will be able to develop your own pricing model based on past performance or you can use vendors that provide scoring models and then assess the liquidity of the accounts based on score and liquidation comparisons.
The final element of buying debt is reviewing the contract of sale. Be sure and focus on the representations by the seller. Do they provide for a refund or a replacement for bankrupt, deceased or fraud accounts? Ask other attorneys to provide a sample contract copy for comparison. Typically, you will have 90 days to put a claim back that is unenforceable. Although no contract will guarantee media, ask the seller how reliable the backup is and try and verify the claims.
If all of these requirements are met, it’s time to set up your debt buying company. Do not sue or pursue the files in the name of the law firm. Beyond the obvious ethical considerations, I really see no value to letting everyone know you buy debt.
Start small. Cut your teeth slowly and learn from your mistakes. Expect a significant minority of the files to be skips. Remember you are buying “bad” debt. If you price the portfolio right, those skips will not really matter. In fact if you accumulate enough of them, someone will buy them from you at a discount as there are buyers who specialize in skip accounts. Realize it may take some time to break even on your investment and you will shell out dollars on court costs. In the end though, if you have the right conditions, debt buying can be a profitable enterprise with no client hassles. Don’t be afraid to ask others out there as there are plenty of attorney buyers to ask. In the end, I have found many attorneys can buy successfully if they conduct their due diligence and find the right sellers with whom they can form a trusting relationship.
Summary:
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Purchasing debt can be a very lucrative move for attorneys with collection practices.
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Be sure your state supports your strategy.
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Buy from someone who you know and/or come highly recommended.
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Start small!
About the author:
Charles Litow is founder and principal of the Litow Law Office in Cedar Rapids. His practice is devoted exclusively to collections. He has over 20 years of experience with collections and the Fair Debt Collection Practices Act. Litow graduated from Coe College with a B.A. degree and received his J.D. degree from Creighton University School of Law. He is a member of the Commercial Law League of America, the National Association of Retail Collection Attorneys, the State Bar of California, the Iowa State Bar Association, the Iowa Creditors Bar and the Missouri State Bar. He co-wrote Collection Issues in California, Problem Collections in California, Collection in the California Construction Industry, Successful Judgment Collections in Iowa and Complying With the Fair Debt Collection Practices Act in Iowa. He has been a frequent lecturer on collection issues.
Attorney Litow can be reached at Litow Law Office, P.C. P.O. Box 2165, Cedar Rapids, IA 52406-2165 Phone: (319)362-3000 Fax: (319)362-3277 or via email at charlie@litowlaw.com