How is debt sold?

Debt collection agencies are companies that purchase debt or "act on behalf" of creditors with the goal of making substantial profits from the debts they recover. The UK debt collection market has experienced considerable consolidation in recent years, with key players now dominating the sector landscape.

However, when a debt collection agency acts on behalf of the creditor, the creditor still retains ownership of the debt. This is an important distinction: being contacted by a collection agency doesn't necessarily mean your debt has been sold.

It's somewhat technical, but for those of you interested, here is a breakdown of how these organisations can generate significant profit from their activities:

Some debt collection agencies focus on acquiring large portfolios of defaulted debt worth hundreds of millions of pounds. They typically pay between 3% and 20% of the debt's face value. For example, if they purchase at 3%, they pay 3p for each £1 of debt owed. Let's say a creditor's portfolio is valued at £500,000 and the DCA pays 3% for that portfolio; they would buy it for £15,000, aiming to recover a total of £500,000 or significantly more than their initial purchase price.

Industry research reveals that debt purchasers typically aim for net internal rate of return (IRR) hurdle rates between 15-20%. This usually aligns with a net cash collection multiple of approximately twice the amount paid for the loan portfolio over 84 months. Lately, successful buyers have been achieving significantly higher returns by extending their collection periods from about 60 months to 120 months.​

While it may seem like there are numerous debt collection agencies across the UK, most—if not all—are owned by a few large organisations that are heavily involved in global debt buying. For example, private equity firms are a key part of this industry. The leading companies in the UK debt collection scene include Metis Bidco Ltd, Cabot Credit Management Ltd, and Arrow Global Ltd, with seven major groups controlling a significant portion of the market.

If your debt is sold, it could be acquired by a random U.S. company such as PRA Group. PRA Group is a debt collection firm that buys many debt accounts from large UK banks and finance companies, typically when accounts default. It is a UK subsidiary of the US PRA Group Inc, a global debt purchaser founded in Norfolk, Virginia, and incorporated in the UK in 2001.

These organisations are heavily regulated. All debt collection agencies operating in the UK must be authorised and supervised by the Financial Conduct Authority (FCA), which ensures they follow ethical collection practices and treat borrowers fairly.

What Are Unsecured Debts?

If you fail to make your agreed payments towards your Unsecured Debts, your account will eventually default. Unsecured debt refers to debt that isn't secured by collateral and doesn't have an asset, such as a property or a car, linked to it. In other words, none of your belongings will be sold to settle the debt if you do not make the payments.

Examples of unsecured debt include payday loans, student loans, overdrafts, store cards, credit cards, utility bills, and personal loans. These are different from secured debts, such as mortgages, which are secured by property.

What Does Default Mean?

Default occurs when your debt is considered a bad debt by the creditor, resulting in a loss. Typically, you will receive a default notice after missing your contractual payments or not paying the agreed amount for three to six months. According to the Consumer Credit Act 1974, your creditor is required to send you a default notice that provides at least 14 days to resolve the issue.

At this stage, your account has been transferred to the Internal Recoveries Department, which typically uses automated workflows. These systems automatically handle the recovery of your debt by sending auto-generated letters and evaluating the possibility of selling it to a debt collector.

The process usually begins when you're facing financial difficulties and contact the creditor because you're unable to pay the agreed amounts towards your debt. It's probably best to use an example to explain this…

The Portfolio System: How Debt Gets Packaged and Sold

Creditors often decide to sell portfolios when they feel it's the right time to recover some of their losses, which can happen whenever they have a sufficiently large portfolio ready to sell. In the UK, the total value of debt sold each year reaches into the billions of pounds, and the market for debt purchasing has grown considerably as more portfolios become available.

If your debt is at the recovery stage, you might think this is when your debt will be sold. It's a fair assumption, but not necessarily true. It depends on the bank's internal systems' indications. Yes, it's all about those systems. The system determines whether your debt should be sold or remain with the creditor.

The reality is that it could be a mix of factors, including the age of the debt, its value, how much the bank receives from you each month, and your payment history. For example, a £50,000 debt that is six years old, with no successful contact or payment history, may be worth much less than a £10,000 debt that is six months old and receives regular monthly payments of £50.

The Economics of Debt Sales: Real-World Examples

If you're paying £1 monthly on a £20,000 debt, you're only reducing it by about £12 annually. If the bank were to sell the debt now for 3% of its value, they'd recoup £600. At the current payment rate, it would take 50 years to earn that amount, so it makes business sense for the creditor to include the debt in their future portfolio.

However, if you're paying £50 per month, it might make sense for them to retain the debt. At £50 per month, the creditor recovers £600 annually—equivalent to what they'd receive from an immediate 3% sale —with the option to continue collecting. Conversely, if you've been paying £1 per month for six years, the sale value of the debt is likely so low that selling may not be worthwhile. In that case, the creditor might hold the debt until it has a sufficiently large portfolio of similar debts to sell in bulk.

Industry data confirms this strategic approach. Total debt held for collection by Credit Services Association (CSA) members amounts to tens of billions of pounds, illustrating the enormous scale of these portfolio decisions.

How You'll Know If Your Debt Is Sold

If your debt is eventually sold, both the new owner and the original creditor will notify you. This is a legal requirement under UK consumer credit regulations. Please do not confuse the sale of your debt with someone collecting on behalf of the bank; this does happen. When a debt is sold, ownership is transferred to the new creditor, who is responsible for collecting the full amount.

What Is Statute-Barred Debt?

Some types of debts are Statute Barred, meaning they are worth very little because they cannot be enforced through the courts. A statute-barred debt is one that is no longer legally collectable due to elapsed time. In the UK, debts become statute-barred after a specific period, as outlined in the Limitation Act 1980.

Most unsecured debts, such as loans, credit cards, catalogues, and overdrafts, usually have a six-year limit in England, Wales, and Northern Ireland. In Scotland, this period is five years. Remember, a CCJ (County Court Judgment) won't be issued if you continue to not pay the debt unless you take action to trigger it.

How Does Debt Become Statute-Barred?

A debt becomes legally unenforceable if you can confirm that all four of these conditions are met:​

• It had been over six years since your last payment, and
• More than six years have passed since the debt first became due, and
• You haven't acknowledged the debt in writing (including emails) during this period; and
• The creditor hasn't already gone to court for a CCJ

It's important to remember that if you make a payment or acknowledge the debt in writing, the six-year limitation period begins again. That’s why debt collectors often send letters asking you to confirm the debt. Doing so could reset the time limit.

The FCA has specific rules regarding statute-barred debts. Under CONC 7.15.8, a creditor must not continue to demand payment from a customer if they have stated that they will not be paying a debt because it is statute-barred. Read more about Statute-Barred debt in our article “What is Statute Barred debt and how do I know if my debt is Statute Barred?”

Finally, your debt might never satisfy the sale criteria, and as a result, it will never be sold. The sale criteria will differ between creditors and portfolios. It is almost impossible to know whether or when your debt will be sold to a debt collector, but you can understand how it works with the information above.

The Real Debt Guy is a qualified financial adviser and a UK debt expert. The information in this article is considered to be true and correct at the publication date.