When your Bank sells your debt....

[cardiac arrest]

We all know Banks can not be arsed to manage their defaulted accounts..Keen as they are to suck you in, increase your credit limit, charge you for anything and everything and then come down on you like a ton of bricks soon as you really need them to provide some support....

but what is that says when they decide to 'offload' the nuisance accounts...(and by offload I mean they write them off against the provisions they have already made in their accounts)...often at something like 10p in the £ of the face value...what is it that says they are allowed to prohibit who is allowed to buy the account ?

I mean, surely in a 'free market' where goods are traded without restriction, the purchasers of such accounts should include the individual who's account it is ?

I know all about the rules whereby DCA's have to be licensed, but do the bad accounts always have to be sold only to organisations that have a license to continue to implement the conditions that remain within the contract ? What is it that says these accounts have to continue to be subject to the provisions within the contract ? I mean, DCA's can (and sometimes do) write off accounts...so why can't Joe Bloggs buy his own account , effectively writing it off too ?

Isn't there some EU law somewhere that states this is a restrictive practice ?

I know I'm dreaming, but has anyone actually been into this and have a definitive reason which states there is a law which stops this ?

It's not like the Banks are bothered either way, they'd get their 10% anyway...it's just a profit making business for DCA owners. The daft thing is you can write to your Bank and offer 15% (say), which they turn down, then sell to a DCA for 10%....nuts isn't it ?

Banks don't get commission from the DCA's, but I suppose if they were known to allow debtors to pay off their debts at 10% of the value then many more creditors would default maybe...but would they ? Would they risk a black mark on their credit file for 6 years, and the hassle that brings ? I doubt it..

Don't banks have a duty to their shareholders to maximise profits..? Are they not compromising that duty by not getting the best price they can for bad debts ? In fact not even prepared to enter into negotiations on many occasions...

[SA Gold]

Re: When your Bank sells your debt....

Interesting thread, CA.

The way banks behave certainly does beg belief but i can't see it changing any time soon. I'd be interested to know if the debts are sold regardless of the outcome.

i.e Bank says "here you go, this geezer owes us £10k - give us £1k and its yours". Anything over £1K is a profit (does anyone know just how much profit they want? I guess as near to the default value as possible). But what happens when people pack up and leave the UK and defaults, CCJ's dont mean anything? Does the DCA then loose that £1K?

Cheers
SA

[Never-In-Doubt]

Re: When your Bank sells your debt....

Haha we had a long discussion about this when we first started out, you'll find me arguing it on MSE as well

Basically, the banks utilise tax write-off so it is those rules you need to study, ie writing off business losses.

I'll elaborate; in the simplest form, let's say the bank has a debtor that owes £10k, they will basically write the £10k off as a business loss meaning they will get tax relief for the actual closing balance meaning if a banks annual tax return was £110k, they'd kinda pay £100k tax as your £10k would be written off against their taxable profits.

So, how does this benefit a bank? Quite simply, once they've written it off they can sell it to a DCA who will then try and recoup the difference from the debtor whilst the bank has washed its hands of it, at this point. After all, it's got its money back. However they actually make a profit by selling it for £x in the £1 as the debt is only ever sold after the bank adjusts their losses meaning if they sold your £10k debt for 10p in the £1 then they'd be making a grand from the sale of it.

Thats about the easiest way to explain the sale process. So, that will tell you why they only sell debts to licensed debt collection firms as selling it to you, would be futile and it's just not done. Why sell it to you, when anything they can earn from it is now clear profit...? So they use a dca - as it's then gone, once and for all and cleared from their books as a manual adjustment (ie whatever they sell it for).

Thats about the size of it, in layman form.

[SA Gold]

Re: When your Bank sells your debt....

Haha we had a long discussion about this when we first started out, you'll find me arguing it on MSE as well

Basically, the banks utilise tax write-off so it is those rules you need to study, ie writing off business losses.

I'll elaborate; in the simplest form, let's say the bank has a debtor that owes £10k, they will basically write the £10k off as a business loss meaning they will get tax relief for the actual closing balance meaning if a banks annual tax return was £110k, they'd kinda pay £100k tax as your £10k would be written off against their taxable profits.

So, how does this benefit a bank? Quite simply, once they've written it off they can sell it to a DCA who will then try and recoup the difference from the debtor whilst the bank has washed its hands of it, at this point. After all, it's got its money back. However they actually make a profit by selling it for £x in the £1 as the debt is only ever sold after the bank adjusts their losses meaning if they sold your £10k debt for 10p in the £1 then they'd be making a grand from the sale of it.

Thats about the easiest way to explain the sale process. So, that will tell you why they only sell debts to licensed debt collection firms as selling it to you, would be futile and it's just not done. Why sell it to you, when anything they can earn from it is now clear profit...? So they use a dca - as it's then gone, once and for all and cleared from their books as a manual adjustment (ie whatever they sell it for).

Thats about the size of it, in layman form.

Cracking explanation mate. Crystal clear!

[Never-In-Doubt]

Re: When your Bank sells your debt....

Sorry forgot to say the sale of the written off debt is a new business transaction that basically gives them a grand profit, just like that, based on the example above. If they let you the debtor pay it off then it'd be questioned plus governance would be difficult hence they sell it externally for a straight profit as a totally new business transaction - remember they usually sell a cd full of accounts, not just yours - it's absorbed into a bulk purchase of debts.

[SXGuy]

Re: When your Bank sells your debt....

Remember it like this.

Bank A has an asset of 10k on their balance sheet (i.e the money you owe them) when you pay some of it off, the balance decreases, the profit increases.

When they sell off a debt, i.e write it off. The asset's value decreases, and is moved over to the p + l as a write off (expense), which lowers the tax liability. Whatever they sell it off for, i.e 1k is added to the p + l profit.

[Deepie]

Re: When your Bank sells your debt....

Remember it like this.

Bank A has an asset of 10k on their balance sheet (i.e the money you owe them) when you pay some of it off, the balance decreases, the profit increases.

When they sell off a debt, i.e write it off. The asset's value decreases, and is moved over to the p + l as a write off (expense), which lowers the tax liability. Whatever they sell it off for, i.e 1k is added to the p + l profit.

y+mx+c=p+1 makes sense.....I can tell what you do for a job

[cardiac arrest]

Re: When your Bank sells your debt....

hang on though, the corp tax is not 100%, corp tax is what, 40% ? so they write of say 10K, and thus save £4k in tax and lose the other £6k o/s..then sell it for £1k and thus they have lost £5k...less of course any profit (interest) they have made on anything you have paid before the write off...

[Enforcer]

Re: When your Bank sells your debt....

Already made a provision for bad debts, allowed against pre tax profit.

[Never-In-Doubt]

Re: When your Bank sells your debt....

Not only corp tax mate - the majority is though. The loss is adjusted as corp tax. It's written off as a total business loss as if it never existed but you take a % from tax, a % from vat, a % from shareholders/profits etc

i tried to simplify it remember.

[greymatter]

Re: When your Bank sells your debt....

Interesting points made simple,thanks.

[cardiac arrest]

Re: When your Bank sells your debt....

Anyway, regardless of the financials, is there any other reason the Banks may be prohibited from actually offering the 'sale' to the debtor..albeit it wouldn't be a sale as such, just an 'agreed settlement' ?? The point I'm after is why the banks don't try and get a better deal from the debtor before flogging it off to a DCA...why are they not actually 'obliged' to do this first, like trying to get the best deal for themselves...and the shareholders ? If the law was such that debtors must be either given first option or simply asked to give a price they are able to pay and then compare that with what the bank would get from a batch sale to a DCA... As far as I can see, it wouldn't actually make them worse off, better off in fact..so who says (if anyone) they are not allowed to do it ? And do we think they should be forced to offer the debtor a chance to bid ?

Sorry if I sound a bit thick, but if it was me having to write off bad debts I'd do my best to get the best price I could....so I must be missing something ....

[Never-In-Doubt]

Re: When your Bank sells your debt....

I've explained why. It's written off so their relationship with you is gone.

They only sell to licensed DCA's. The money doesn't matter as it's already been written off (so the bank hasn't lost)....

[SXGuy]

Re: When your Bank sells your debt....

All they are selling is the agreement, which is what holds a value. When they offer you a full and final to settle, then they are offering you to buy it back are they not? Its the same princple, as Niddy says, either way, the balance gets written off.