Do You Owe a Debt That Was Sold for Pennies?

Defaulted consumer debts are routinely sold, often in large portfolios, for a small fraction of their face value. A natural question follows, and is often asked with real indignation: if a buyer paid four cents for a dollar of debt, why should the debtor owe the full dollar? A related claim holds that the sale itself, or the original creditor's having written the debt off, extinguishes the obligation.

The question combines several legal issues that are easier to answer separately: what a sale of debt actually transfers; whether the price paid changes the amount owed; what the buyer must be able to prove; and what federal law says about collecting purchased debt.

What the market looks like

The most detailed public study remains the Federal Trade Commission's January 2013 report, The Structure and Practices of the Debt Buying Industry, based on data from the largest debt buyers covering 2006 to 2009. Analyzing more than 3,400 portfolios, the Commission found that "buyers paid an average of 4.0 cents per dollar of debt face value," and that older debt sold for significantly less than newer debt.

The same report found that buyers often received little documentation at the time of purchase, and that sellers frequently sold accounts "as is," disclaiming warranties about accuracy. Those findings bear directly on the questions of proof discussed below.

What a sale transfers

Most credit-card and similar consumer debts are not negotiable instruments. They are contractual rights to payment, which the Uniform Commercial Code treats as "accounts," a category that includes rights to payment "arising out of the use of a credit or charge card" (UCC §9-102). Sales of accounts fall within Article 9 of the Code (§9-109).

The general rule of assignment is that the buyer steps into the seller's shoes. Under UCC §9-404, the rights of an assignee are subject to "all terms of the agreement between the account debtor and assignor and any defense or claim in recoupment arising from the transaction that gave rise to the contract," along with certain other defenses and claims arising before the debtor received notice of the assignment. The buyer acquires what the seller had: no more, and in general no less.

That rule cuts both ways. The debtor keeps defenses he had against the original creditor. But the debtor's obligation is measured by the original agreement, not by the price the buyer later paid. The price is a term of the contract between seller and buyer, to which the debtor was not a party. Older doctrine treats the point the same way; in Carpenter v. Longan, 83 U.S. 271 (1872), the Supreme Court said of an assignee enforcing a note and mortgage that "the amount due was the face of the note and interest," and that "equity could not find that less was due."

The strongest version of the argument

The argument's moral force is considerable. A buyer who pays four cents and collects a dollar earns a large return on debts that the original creditor had treated as unlikely to be paid, and the debtor sees none of the discount. Critics argue that the economics encourage collection on accounts with poor records, and the FTC's findings about limited documentation give that concern a factual basis.

But the moral argument is an argument about policy, not about the existence of the obligation. The law of assignment has never measured a debt by what a later assignee paid for it. A creditor who sells a debt at a discount has decided to accept less money now in exchange for the transfer of the right to collect; it has not released the debtor. Accounting treatment of the debt by the original creditor, such as a charge-off, records the creditor's assessment of its value and does not, by itself, discharge the debtor's obligation.

Proof is a separate question

Where the argument becomes legally significant is proof. A purchaser seeking to enforce must be able to show that it actually owns the particular account, and what is owed on it. The Code provides that an account debtor who receives notice of an assignment may request "reasonable proof of the assignment," and until it is furnished may discharge the obligation by paying the original creditor (§9-406(c)). The purpose, as with negotiable instruments, is to protect the debtor from paying the wrong party.

The Fair Debt Collection Practices Act adds a verification procedure. A debt collector must give the consumer written notice of the amount and the creditor, and if the consumer disputes the debt in writing within thirty days, the collector "shall cease collection of the debt, or any disputed portion thereof, until the debt collector obtains verification of the debt" and mails it to the consumer (15 U.S.C. §1692g(a)–(b)). The Act also provides that a consumer's failure to dispute "may not be construed by any court as an admission of liability" (§1692g(c)).

Weak records, in short, can matter a great deal in a particular case. But they matter as a question of whether a specific claimant can prove a specific claim, not as proof that the debt has ceased to exist.

Who counts as a debt collector

A frequent assumption is that every debt buyer is a "debt collector" under federal law. The Supreme Court addressed part of that question in Henson v. Santander Consumer USA Inc., 582 U.S. 79 (2017). In a unanimous opinion by Justice Gorsuch, the Court held that a company collecting debts it purchased for its own account is not a debt collector under the statutory definition's prong covering those who regularly collect debts "owed or due ... another." The Court expressly did not decide whether such a company might qualify under the definition's other prong, which covers businesses whose "principal purpose" is the collection of debts, and it observed that arguments about whether debt buyers should be covered as a matter of policy are "matters for Congress, not this Court, to resolve."

Whether a particular debt buyer is subject to the Act therefore depends on its business, and many states have their own statutes regulating debt buyers.

What can reasonably be concluded

The price at which a debt is sold does not change the amount the debtor owes under the original agreement. A buyer generally acquires the seller's rights, subject to the debtor's defenses, and must be able to prove what it bought. The low prices and thin documentation that characterize much of the market give real weight to questions of proof and to policy criticism of the industry. They do not, in themselves, extinguish the obligation.

The archive's entry on assignment of debt: when obligations change hands covers the underlying law of transfer, and when a debt stops existing on the record considers when an obligation does end.