Having debt go into collections or sold to a debt buyer can be stressful and confusing, especially in terms of how it affects your credit score. Your credit score plays a huge role in your financial life, impacting your ability to get loans, credit cards, mortgages, insurance rates, apartment rentals, and sometimes even jobs or utility services. So it’s important to understand what happens when your debt gets sold, and what rights and recourse you have as a consumer. This guide will explain debt buying, how it can affect your credit, and tips for dealing with debt buyers and fixing any credit score damage.

What is Debt Buying?

Debt buying is the practice of purchasing delinquent or charged-off debts from banks, creditors, or other organizations at a steep discount. The debt buyer becomes the new owner of the debt and gains the right to try to collect the full amount owed. 

Debt buyers pay on average just pennies on the dollar for debts. For example, they may buy a $1,000 credit card balance for $200. They can then attempt to collect the full $1,000 balance owed plus interest and fees. If successful, this results in huge profits for the debt buyers.

Debt buyers may purchase medical debt, credit card debt, utility bills, personal loans, and more. These purchased accounts are often several years delinquent. When a debtor stops making payments for an extended time, the original creditor may decide recovering money on the account is unlikely, and sell it to a debt buyer speculating they can recover more value.

How Debt Buying Works

There is a multi-billion dollar industry around buying and selling consumer debt. Here is a typical process:

– A bank or original creditor charges off your account after 180 days of no payments. At this point you owe them money, but they no longer expect repayment.

– The original creditor bundles similar bad debts and sells this portfolio for pennies on the dollar to a debt buyer. 

– The debt buyer tries to collect through letters, phone calls, lawsuits and other methods. Their goal is to get the debtor to repay some or all of the amount owed.

– If partially or fully successful at collecting, the debt buyer makes a large profit margin on the debt they purchased cheaply.

– After several collection attempts fail, debt buyers may re-sell the account to another collector for further attempts or to cut losses.

– Typically there are multiple rounds of buying and selling delinquent debts before they become obsolete under the Fair Credit Reporting Act after 7.5 years.

Debt buyers may outsource collection activities to third party collection agencies but still ultimately own the debt. The largest debt buyers include Encore Capital, PRA Group, and Portfolio Recovery Associates.

Debt Buying and Credit Reporting 

When your debt gets sold, how does this affect your credit report and scores? Here are some key facts:

– Debt buyers have the same rights as original creditors to report debts to the credit bureaus. When your account is sold, it can stay on your credit report with the new debt owner’s name.

– The total balance owed, late payments, and other negative history will remain on your credit report after a sale. The debt buyer cannot re-age the debt to restart the credit reporting time limits.

– If a debt buyer purchases your account after it has already been charged-off by the original creditor, your credit score is unlikely to be further impacted by the sale.

– However, if the debt was still active with the original creditor at time of sale, your scores could worsen if the debt buyer reports additional missed payments, collections activity, or other deteriorating account status.

– If a debt in collections is sold, it may show up twice on your credit reports under both the original and new creditors. This is legal as long as accounts are not duplicated.

– You have the right to dispute any errors or outdated information reported by debt buyers and request removal. Disputed info must be verified or it will be deleted from your credit reports.

How Debt Sales Affect Your Credit Score

Now let’s explore in more detail how different debt sale scenarios can impact your credit scores:

Charged-Off Debt Sale

If an account is charged-off by the original creditor and then sold, it has usually already caused maximum damage to your credit scores. FICO and VantageScore models penalize:

– Severely delinquent accounts over 90-180 days past due

– Accounts charged-off as losses by creditors  

– Sent to collections accounts

Once a delinquent account hits your reports, your scores quickly drop. But after that point, further status changes as the debt is sold and re-sold usually don’t worsen scores. 

For example, if a credit card company writes off your account after 6 months unpaid, credit scoring formulas recognize the severity of this. When a debt buyer purchases this bad debt, new missed payments or collections typically don’t compound the problem.

Settled Debt Sale

One scenario that can cause additional credit score damage after a debt sale is if you settle a debt in collections or being sold. Settling is when you pay less than the full balance owed as a final resolution.

Settling directly with the original creditor leads to the account being marked “settled” on your credit reports rather than the previously worst statuses of “charged-off” or “in collections”. Settling is seen as a positive step by credit scoring models. 

However, if you settle with a debt buyer after charge-off, this may be reported as a brand new separate collections account. This can hurt scores that benefitted from the settled status with the original creditor.

Active Debt Sale 

Having an active, current account sold is the most damaging scenario from a credit reporting perspective:

– If you were still paying on time when sold, now the buyer reports missed payments

– Your account status deteriorates from “current” to “late”, “collections”, etc. 

– VantageScore 3.0 may ignore the late payments if you were up to date with the original creditor. But other scores will see this as new negative information.

Tips for Consumers When Debts are Sold

If you find out your debt has been sold, here are important tips to protect your credit and handle debt collectors:

Review account details carefully: Debt buyers often receive very little information about purchased accounts. Mistakes frequently happen with names, balances owed, interest rates, included fees, etc. Ensure you are not paying incorrect amounts.

Exercise statute of limitations rights: In most states, debt collectors can no longer sue consumers for debts older than 3-6 years. Know if the statute has expired on your old account and use this defense if sued. Time limits vary by state.

Request debt validation: You have the right to request in writing that the collector validate the debt details within 30 days. This can lead to them dropping the account if unable to verify it is accurate and legally collectible. 

Negotiate settlements: Debt buyers often accept steep settlements because they purchased debts cheaply. See if they will agree to resolve an account for less than you owe – potentially much less for older debts. Get any settlement agreement in writing.

Don’t acknowledge debts as yours: Never make a payment or promise to pay without first receiving written validation. This could restart the statute of limitations period. Be careful what you say on collection calls.

Prioritize debts wisely: Defaulted student loans, taxes owed, and child support should be paid before unsecured debts purchased by collectors. Don’t let collectors intimidate you into paying the wrong accounts.

Disputing Errors on Your Credit Report

If you believe a debt collector is reporting incorrect information about you to the credit bureaus, you have the right to dispute this. Here is the most effective process:

Get copies of your credit reports – On annualcreditreport.com, you can access free reports from Equifax, Experian and TransUnion once per year. Review all account information.

Identify inaccuracies – Note any debts you don’t recognize, balances owed that seem too high, mistaken personal details, etc. Debt collectors often report wrong information.

Submit dispute letters – Write dispute letters to each credit bureau that includes account info, the inaccuracy, and what the correct version should be. Include copies of any proof. Send letters by certified mail.

Wait for investigation – Credit bureaus must investigate within 30 days of receiving dispute letters. Typically they just reach out to the collector to verify, and don’t dig deeply.

Follow up persistently – If inaccuracies remain after the investigation, escalate your dispute to the credit bureau’s regulatory department. Repeat disputes until resolved.

Following this process consistently gets errors fixed, including those reported by debt buyers. This can help improve your credit scores.

Improving Your Credit Score After Debt Sales 

Finally, here are some general tips for rebuilding your credit if delinquent accounts have been sold:

– Pay all current accounts on time going forward – this positive track record helps offset old issues.

– Keep credit card balances low and credit utilization rate under 30%.

– Write goodwill letters requesting removal of negative items – collectors may agree to delete for PR reasons.  

– Don’t close old credit cards – having long open accounts improves your credit mix. 

– Limit new credit applications – too many can indicate risk and further hurt scores.

– Build savings so you can settle collection accounts – this raises your scores if marked settled.

– Wait patiently – bad debts stay on your report 7 years and weigh less over time.

With perseverance, you can recover from the credit impacts of past due accounts, whether with original or new creditors. Be proactive about protecting your rights and disputing any errors.

Conclusion

Having past due accounts sold to debt buyers can be stressful. But learning how it affects your credit equips you to take action to minimize damage and restore your scores. Be sure to verify any debts, know your legal protections from collectors, and dispute inaccuracies. With time and diligently rebuilding credit, you can achieve financial health again after debt sales.