The secondary debt market is a term that is used to describe a market that is based on the sales of debt instruments as a means of generating some sort of income. Within this market, speculators purchase existing debt from owners for a percentage of the face value of that debt. The idea is that as the new owner, the speculator can eventually collect that face value and be able to offset both the purchase price and the resources expended in attempting to collect that outstanding debt.
One of the more common examples of a secondary debt market is a company that buys delinquent and defaulted debt instruments. This may include balances remaining on defaulted loans or even on credit card or other types of revolving credit accounts. Typically, the buyers will focus on defaulted accounts that the owner has been unable to collect, and is considering either writing off the balances as bad debt or taking some sort of legal action. The buyers offer an alternative by agreeing to purchase the debt for a percentage of the total amount due, effectively providing the original owner with at least some compensation while also making it possible to avoid additional legal and other expenses associated with that debt.
A secondary debt market may focus on credit card accounts that have been closed to further use due to non-payment, or even focus on various types of unsecured loan arrangements that have gone into default. It is not unusual for the buyer to implement their own collection procedure that may include everything from attempts to arrange a liberal repayment plan with the debtor to taking legal action to collect the debt by means of seizing assets of the debtor or garnishing the debtor’s wages.
In terms of profitability, participants in a secondary debt market normally purchase past due debts at extremely low rates. Making a profit off the purchased debt is typically easier to manage, even if some of the purchased debt is ultimately not collected. Even if the buyer purchases ten different debt accounts from the same company, it may take only collection on one of those ten to break even and a partial collection on a second one to clear a profit.
As with any type of market activity, participation in a secondary debt market does present some risk. Failure to qualify debt before purchase can lead to assuming a significant amount of debt that will never be recovered, regardless of the strategies employed. In addition, laws and regulations related to debt collection in general may limit the range of strategies that can be employed, a factor that further reduces the potential of collecting on past-due debt. Since it may take an extended period of time to realize any type of return, it is important to have a solid financial base before choosing to buy on a secondary debt market.