Buying debt got its start in the United States largely because of the savings and loan scandal of the 1980's. At this time, these S&Ls were closing at a significant rate. The FDIC (Federal Deposit Insurance Corporation), which insures account holder's deposits to a certain amount, took over the assets of these S&L's (also called thrifts) to cover their costs in paying back bank depositor assets. This practice has now developed into a cottage industry with everyday folks now buying up charged off accounts for collection.

Such deeply discounted pricing can potentially mean great profits. Pricing is based on a few factors: how fresh the debt is, and the number of times they've been placed previously with a collection agency. Accounts are priced at a premium initially but then lower with each agency level.

Those buying debt range from larger companies, such as private equity firms, down to small collection agencies or private debt collection law firms. They purchase these charged-off debts from a creditor for a fraction of the face value of the debt. The debt buyer can then collect on it from their office, place the debt with an attorney or collection agency, sell off unwanted accounts from the portfolio or any combination of the above. Purchased debt portfolios usually consist of charged off consumer credit card accounts, telecom, pay day loans, medical, or utility debt. Banks also sell their written off checking and ATM/debit accounts, called demand deposit accounts or DDA.

There are a couple of ideas to consider when going in to make your first debt purchase:

1) Many folks just starting out will purchase a small portfolio of accounts in their own state, place them with an already established collection outfit, and then follow up from time to time to monitor progress with the debt. This is probably the most hands off approach but the easiest for a new debt buyer.

2) More experienced industry folks may prefer to collect on the accounts personally, which gives them more control over the resolution process. I can't stress enough that this is for the experienced collector, new debt buyers attempting this can get into legal hot water without a full understanding of the collection laws in their state.

The growing availability of such assets for the general public was the catalyst that launched buying debt as an industry. With five years of experience in this business, I can tell you that the return potential is definitely there if you approach it correctly. One point I want to make clear- a new buyer shouldn't approach this business trying to take on the largest possible investment up front. I am no advocate of people going out to purchase as much debt as they can afford and then collecting with a take no prisoners approach. Buyers that engage in this type of predatory activity give the industry a bad name and can quickly lose the support of some of the industry veterans, people that you need in your corner when it comes to advice on best practices. Collections shouldn't be an intimidation business, I have always had the best results when I have worked with a debtor to understand their problem and find a solution.

When managed correctly, this can be a fun and lucrative business.