In order to turn a profit from buying bad debt, brokerage firms and other debt collection agencies must consider all the ramifications to reason out the most lucrative investment options. Often, older debt and charge offs lead to the greatest profit. Attempts to collect on fresh charge offs and debts are less successful for these purchasing agencies because the reasons behind the bad debt still follow the debtor.

When a debtor allows a credit card to be charged off, it is typically because he or she is truly unable to make even a small payment to the credit agency. Due to unemployment, illness, or other extenuating circumstances, the issuer of the credit is unable to collect even a small percentage of the debt owed, sometimes not even collecting $0.15 on the dollar.

With the banks pursuing such a small percentage of the debt and having little success, how can an outside firm buying bad debt profit? Simply put, the odds are against them.

In many cases, it is highly likely that the debtor will file bankruptcy during this early period. Therefore, buying bad debt that has been around for over a year can lead to a greater return on investment for the purchasing firm.

At this time, banks are likely to stop the pursuit of bad debt, having used enough resources attempting to collect on the money owed. Rather than use any more time and money, they will often be pleased to sell the portfolios for a minimal return, simply to rid their books of bad debt.

In addition, 12-18 months typically allows enough time for a debtor to resolve the issues that caused them financial trouble in the first place. In most cases, they will have recovered from any illness and found employment during this time, making it possible for them to make good on at least a portion of their debt owed. This means the firm buying bad debt will be able to recover a larger percentage of the debt they purchased for a greater profit margin.

On the other hand, a newer charge off is harder to profit from. Early on, banks will demand a greater percentage as payment for the purchase of bad debt portfolios, and pursuing debtors will result in less funds recovered. A brokerage firm can also succeed based on previous attempts at collection, with the debtor growing tired of receiving collection calls from the issuing creditor or perhaps other collection agencies.

Though logic may state that a fresher debt is easier to pursue, the opposite is true. Buying older debt leads to greater profit margins for brokerage investors. The original creditor is more likely able to successfully collect on fresh charge offs, leaving older debt portfolios as a source of income for debt collectors.

Next, explore more important information and resources on buying bad debt services, in addition to collection agencies solutions.