I recently was asked to review a business plan for a person who had already purchased credit card charge off debt as an investment with the goal of earning at least four times the amount of his principal investment after deducting for all costs. 

He was hoping to form a business, the reason for the business plan, and attract other investors to purchase additional charged off credit card debtor accounts.  In reviewing his first draft of his business plan, I immediately noticed that missing from his plan, was how to evaluate charged off credit card accounts worthy of being purchased for their return on investment value.  When questioned about what steps were taken to evaluate and make an informed decision about the credit card accounts selected for purchase/investment, he stated that he relied on a third party to select which portfolio of charged off credit card accounts to purchase.  I questioned him about the due diligence process used by the third party and he was unable to answer the question.  I finally requested a copy of the Agreement between the Seller of the credit card accounts and the Buyer.  

The Seller turned out to be a nationally known broker company and the Buyer was the person with the business plan.  After reviewing the Purchase Agreement, I was surprised to learn that although he relied on a third party to select accounts worthy of his investment, the third party along with the Seller, had a number of disclaimers in the Agreement as well as mentioning that the Buyer was solely responsible for evaluating and the due diligence in arriving at an informed decision concerning the credit card accounts purchased.  What was also illuminating was the fact that the Seller in the Agreement stated that they were not associated with the third party, but included them in all of the disclaimers. 

The Correct Choice

Had the buyer consulted with me prior to making his initial investment, he would have been more informed and less likely to rely on a third party that was included in some of the disclaimers in the Purchase Agreement. That said, the following points are the result of my research and findings concerning how to arrive at an informed decision should you decide to invest or purchase charged off credit card debt accounts.

Unlike the individual referenced above,  who in my opinion should have not invested in discharged credit card debt without consulting a professional investor familiar with such an investment, I will attempt to provide some due diligence guidelines that will help the reader arrive at an informed decision in determining whether to purchase a specific portfolio of discharged credit card accounts.

 First, the key to any investment is the ability to make an informed decision, which involves understanding all of the risks and being able to forecast with a degree of certainty the outcome(s) of your informed decision.  Basic to this process is your responsibility in spending time to do your due diligence and uncovering all the information available to make a sound investment decision.  Short of not being able to access information, causing limits to your due diligence process, will only restrict your understanding of the risks and outcome(s) involved in your decision to invest in a particular investment.

Purchasing discharged credit card accounts is very similar to the purchasing of delinquent medical accounts.   Both require a thorough analysis of the debtor and their ability to pay. 

 The analysis process begins with being able to identify who the debtor is and determining if the information available is current.  The investor must have access to the debtor’s contact information: name, address, and home or cell number; all information must be current so that immediate contact with the debtor can be implemented.  During the initial contact with the debtor, the debtor’s employment status can be determined, which will aid the investor in assessing the debtor’s ability to pay.

 The amount of the debt and when the last payment was paid will provide some insight as to the length of the collection process required.  Generally, a low balance debt in most circumstances will lead to a faster recovery period, assuming the debtor is in a position to make payments.  

 The debtor’s credit report or profile will provide a potential investor with the core information needed in making an informed decision.  Most credit card and automobile loan lenders will rely primarily on the debtor’s credit history to qualify for a loan.  The credit report will disclose the total amount of debt owed, the number of creditors, and how delinquent the debtor is with his creditors.  Also, the credit report will provide an overall credit score for the debtor.   The credit report will also disclose if the debtor has filed for bankruptcy and if the debtor has judgments filed against him. 

The ability to examine the above information prior to purchase of any portfolio of discharged credit card debt will serve as critical data to analyze the collectibility of the accounts in the portfolio and at the same time minimize those risks that can be red flags or signs that determine which accounts in the portfolio are not collectible.  Following such an examination, the investor can then make an informed decision to purchase a particular portfolio of charged off credit card accounts. 

The debtor’s contact information, job status, and credit report or profile are the key variables that are applicable to collection of consumer debt.   However, there are other issues that may also affect the debtor’s ability to pay.   For example, if the debtor owns a home and has available equity in the home and as long as the debtor has the means to pay back an equity line on a monthly basis,  the debtor may choose to pay off the credit card debt in order to avoid the higher interest generally associated with such debt. 

If you decide to pursue investing in credit card debt, please consult with an experienced investor who is familiar with and can guide you through the entire process in order to avoid the risks and pitfalls mentioned above.   

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