It doesn’t matter if you’re someone who borrows money or lends money. It’s crucial that you understand selling debt in the UK. In this guide, we will take you through everything you need to know about it. Starting from how it’s done to what your rights are.
With a focus on legal obligations, debtor rights, and the roles of debt collection agencies, we navigate through the often-misunderstood terrain of debt selling in the UK, equipping you with essential knowledge and practical tips.
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Types of Arrears Sold to Collection Agencies
If you have not made your payments on time and it is now in arrears, your creditor might decide to:
- Hire a debt collection company to recover the money
- Sell your debt to a debt collector
When it comes to debt collection, this is a normal part of the process. Some of the most common types of arrears that this happens to include:
- Overdrafts
- Credit cards
- Loans
- Store cards
- Catalogues
- Hire purchase arrears
Why Do Creditors Start Selling Debt?
Sometimes creditors find themselves in challenging situations where recovering debts becomes a difficult task. Recovering overdue payments can often involve:
- Lengthy legal processes
- Constant follow-ups
- Significant investment of time and resources
However, these might not always yield positive results. This is precisely where the concept of selling debt to a collection agency becomes a viable strategy.
By selling the debt, creditors transfer the burden and responsibility of debt collection to a specialised agency. These companies are highly experienced when it comes to recovering debt, and they have the resources to do so.
- Immediate Financial Recovery: By selling debts, creditors can immediately recover a portion of the outstanding amount. This is beneficial in situations where it’s difficult to recover the entire amount. It will also help to save time and effort.
- Minimising Losses: Selling debt is a strategic move to minimise losses that could accrue from pursuing long-overdue debts. It’s about cutting losses and moving on.
- Resource Allocation: Creditors can reallocate resources more effectively. Instead of chasing arrears, they can focus on other important matters.
- Risk Management: Selling debt is also a form of risk management. Creditors mitigate the risk of total loss by getting a guaranteed, albeit reduced, amount back.
- Market Dynamics: Creditors must keep up with the ever-changing financial landscape. Selling debts allows them to adapt quickly to market changes and maintain financial stability.
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Who Buys Debts & Why?
Typically, the players in this field are debt collection agencies and specialised debt purchasers. These agencies step in when creditors conclude that direct recovery of the debt is unlikely. They purchase debts, usually at a fraction of their original value, with the intention of making a profit by collecting the full amount.
The business model of debt buying is inherently risky. Agencies bet on their ability to recover the full debt amount, or more, to turn a profit.
How does it Work?
A debt collector usually aims to collect debts.
- Some debt collectors work for creditors and recover the debt for them.
- Other debt collectors purchase debts and thereafter chase for their own profit.
- Some debt collectors are involved in doing both.
On the other hand, a debt purchaser buys debt from creditors in large amounts. For example, the steps for this process include:
For the creditor, when they sell a debt, it benefits them because:
- It helps them to recover at least some amount of the money.
- In a situation where a debtor decides to take up a payment plan, the lender will have to wait for a long time in order to recover the money in full.
- Selling a debt will help them get the money at once and thereafter focus on their business as usual.
The Difference between Bailiffs and Debt Collectors
The most important point to note about this is that debt collectors don’t have any type of legal powers. But bailiffs do have. They can be:
- Self-employed
- Working for private companies
- Working for the council
Some priority debts that bailiffs aim to collect include:
- Parking fines
- Council tax arrears
- County Court Judgements (CCJs)
- Child maintenance arrears
Bailiffs have the right to come to your home and seize goods as long as they have a court order. Thereafter, they can sell these items to recover the value of the debt.
On the other hand, debt collectors, who are also called field agents or doorstep collectors, work for either:
- A creditor
- A debt collection company
When you owe someone money, and you haven’t paid on time, they might decide to send a debt collector to your home. However, note that these agents don’t have the right to take anything from your home or do anything that goes against the rules and guidelines of the Financial Conduct Authority (FCA)
A bailiff can go to a debtor’s home only after court action by:
- Magistrates Court
- County Court
- High Court
However, when it comes to HM Revenue and Customs (HMRC), they can use bailiffs without any court action.
A bailiff is normally used if:
- You fail to stick to the agreement and keep up with the payments, or
- You ignore letters sent from the court
A debt collector can collect a debt when:
- The debt has been passed on to them
- They are collecting the debt on behalf of your creditor
Debt collection companies also purchase debts from creditors. This mostly happens when you default on payments.
How Does it Affect Me When a Lender Sells off Debt?
When a lender decides to sell a debt owed to you in the UK, it might seem like a mere transaction in the financial world. However, this decision has direct and significant implications for you as a debtor. The most immediate effect is the change in the entity to whom you owe the debt. But what does this actually mean in practical terms?
- Unchanged Terms and Conditions: Your legal standing, along with the rights and obligations under the original debt agreement, remain unchanged. The new creditor cannot arbitrarily change the terms of your agreement.
- Continuity of Obligations: The continuity of your obligations means that your repayment plan continues under the same conditions but with a different creditor.
- Rights and Duties Transfer: The debt collector assumes all the rights and responsibilities of the original creditor. This transfer is seamless in legal terms, but it introduces a new dynamic in your debt repayment journey.
- Negotiation and Repayment: note that even though the creditor you owe money to changes, the debt does not. Openly communicating and understanding your financial situation during this time is crucial.
One question you might have is, how does this transfer affect your credit score? The answer is nuanced. The process of the arrears being sold to a collector does not negatively impact your score. But it will be affected depending on if you make the payments on time thereafter.
While the new creditor cannot change the original terms, there might be room for renegotiating the repayment plan. This can be a crucial step, especially if your financial situation has changed.
If your financial situation has deteriorated, and you’re unable to meet the repayment obligations, there will be consequences.
The new creditor take legal action against you. But there are steps you can take to mitigate this. Understanding your rights and potential solutions is crucial.
In the next section, we will explore the strategies to deal with such scenarios. How can you negotiate under financial strain? What are your rights when facing aggressive debt collection tactics? Stay tuned to uncover these vital insights.
Should You Pay a Debt Collection Agency?
When navigating the complexities of selling debt to a collection agency, it’s crucial to understand your obligations and rights as a debtor. The sale of your debt marks a significant change in who you are dealing with.
First, ascertain if the collection agency has purchased your debt or is merely representing your original lender. This distinction is critical in determining your course of action.
If the agency owns your debt, it’s vital to open a channel of communication. Discussing and exploring feasible repayment options with the new creditor can lead to more manageable repayment terms. In most cases, you should pay them.
However, as mentioned before, negotiating a payment plan is an option if you’re struggling to pay it off.
If you’re pursued for a debt that’s not yours, or if the agency’s practices seem unfair or illegal, you have every right to dispute their claims. Understanding the legal limits of a debt collection agency’s powers is crucial in these scenarios.
Debt collection agencies are bound by legal norms. If their actions violate these norms, you can and should challenge them.
Take a look at this forum post where a user explains the different experiences he has had with debt collection agencies and how he’s effectively dealing with them:
Can You Dispute a Debt if it was sold to a Collection Agency?
A debt collector does not have more rights than your original creditor. So, if you don’t believe you owe them or are in a situation where there has been a mistake, you can dispute it.
For example, if your debt is statute-barred, then you’re not obligated to pay it. Also, there is a possibility that it might be unenforceable.
This indicates that it does not comply with the Consumer Credit Act 1974 (CCA). This mostly happens when the debt goes between so many debt collection companies, making it difficult for creditors to comply with requests for information.
How Can I Avoid My Debt Being Sold to A Collection Agency?
If you want to avoid your debt being sold by your creditor, it’s crucial that you communicate with them. Most of the time, ignoring creditors and their attempts to reach out to you will result in them deciding to sell your debt.
The reason for this is that they assume that they will never be able to recover the debt from you as you are not communicating with them. So, communication is crucial. Secondly, if you’re struggling to pay, request a payment plan from your creditor. They will then provide you with a payment plan with affordable monthly payments.
If you’re unable to afford a payment plan, you can consider taking up a debt solution. There are many debt solutions available in the UK that help to write off debt. Some of these include:
However, note that while the right debt solution can help you write off debt, choosing the wrong one will be expensive and might even worsen your situation. So, before you make the decision, reach out to a debt charity for some advice. Alternatively, feel free to fill out our online form, and our MoneyAdvisor team will guide you.
Key Points
- It is legal for creditors to sell debts to third parties, especially when they anticipate difficulties in recovering payments.
- Creditors can sell debts to debt buyers, who may collect the debt themselves, use third-party services, or resell it as part of a debt portfolio.
- Debtors are usually informed by the original creditor and the new debt owner (collection agency or debt purchaser) when their debt has been sold.
- The debtor’s legal standing and obligations under the original agreement remain unchanged after their debt is sold to a new creditor.
- When dealing with debt collection agencies, it’s important to verify whether they own the debt or are collecting on behalf of the original lender.
- Debt collectors must adhere to legal norms and cannot threaten debtors with consequences outside their legal rights, like imprisonment.
- Debt collectors can take debtors to court for non-payment or lack of communication, but they must first issue a warning letter before proceeding with legal actions.
- Open communication and negotiation with new creditors are key, especially if the debtor’s financial situation has changed.
- Debtors have the right to dispute claims, especially if they are pursued for incorrect debts or face unfair collection practices.
- For creditors, selling debt is a strategic move to recover a portion of the debt amount, minimise losses, and reallocate resources more effectively.
References
Financial Conduct Authority (FCA)
FAQs
Yes, it is perfectly legal to sell debts to a third party in the UK. Creditors often resort to this option when they anticipate difficulty in receiving payments. However, there is a crucial aspect to remember: the selling of debts typically occurs after you’ve stopped making repayments. At this juncture, the lender is both allowed and likely to sell your debt to a third party.
Absolutely. A creditor can indeed sell a debt to a debt buyer. These buyers have the option to collect the debt themselves, employ a third party for collection, or even resell it as part of a debt portfolio. This process forms a critical part of the debt recovery and management landscape in the UK.
Typically, your original creditor will inform you if they have sold your debt. You can expect a notification, often a call or a letter, letting you know about this change. Additionally, the third party that now owns your debt will likely send you a letter indicating that you now owe the debt to them instead of the original lender. At this stage, it’s important to inform the new debt owner of your financial situation and any ongoing money management efforts.
Debt collectors in the UK are permitted to work on behalf of the lender and seek repayment from you. However, they are bound by legal and ethical guidelines. They must not threaten you with consequences that exceed their legal rights, such as threatening jail time for non-repayment. If they engage in such practices, you have the right to invoke legal action against them.
Yes, debt collectors have the legal authority to take you to court if you have been avoiding debt payments or if they have been unable to contact you over an extended period. This action is subject to strict conditions, including the requirement that collectors must first send you a warning letter before initiating court proceedings. This letter serves as a formal request for payment and a notice to avoid court involvement.
