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Chapter 1 
Delinquent Debt:
An Overview

WHAT IS DELINQUENT DEBT?

Basically, delinquent debt is money that is owed, past the traditional 30-day period, by one party (the debtor) to another party, for goods or services rendered. Although debt over 30 days is considered delinquent, we are primarily talking about accounts that are still outstanding after 180 days. That is traditionally the point at which companies write off their debt--where they realize that the delinquent account may not be collectable.

Within the 30-180 day period, companies will try various tactics to collect the money, using their internal people: bookkeepers, comptrollers, or even their corporate attorney. They may have also given the accounts to a collection company, or two, or three, to try to recoup as much as possible before they finally make a decision to write off the debt.

As a certified cash flow broker, you have the opportunity to help these companies obtain cash from "dead" accounts. You will be involved in the process of buying and selling this delinquent debt which has been written off---categorized as "charged off bad debt"---by various companies and institutions.

Let's take a look at the players involved in the transactions:

· The Seller (debtee) - the company or institution that has delinquent debt that they want to sell;

· The Buyer (funding source) - the investor who will be purchasing that debt;

· The Payor (debtor) - the person who owes the money.

Your role, as a broker, will be that of working with--and coordinating efforts between--the Seller and the Buyer. The Buyer will want as much information as possible regarding the Payor, because this information is the criteria used by the buyer in determining the price they are willing to pay for the debt. Although the Seller is the one who has this data, it is up to you to get the information in the form that is most useful to the Buyer.

As you will be reminded over and over again, the more information you get, the more the debt may be worth.

PORTFOLIOS AND POOLS

You are seeking portfolios, or pools of delinquent debt, not individual accounts. Portfolios or pools are groups of accounts that will number in the hundreds, or tens of thousands.
An individual account, or very small pools, is not normally sellable because the risk to the buyer is too great: the odds of not collecting on the account are too high for an investor to even consider. (If you come across an investor who will, call us right away!) You see, if the buyer doesn't collect that individual or small group of delinquent accounts, he has lost his money. Portfolios are sellable because the buyer's risk is spread over many accounts, and the chance of his collecting a good percentage of those accounts increases dramatically. So don't waste your time when you come across an individual account that is for sale.

The great thing about delinquent debt is that it leads you to many other income-producing possibilities. Companies with delinquent debt may be wonderful prospects for factoring, equipment leasing programs, or installment contract purchasing.

Are we getting your attention now? We will address this more in the chapter on "Cross Selling."

Bottom Line:
Look for portfolios only---the bigger, the better.

PERFORMING
SUB PERFORMING
NON-PERFORMING


The portfolios you uncover may be performing, non-performing or sub-performing.

Performing means that money is being received by the debtee from the debtor, but it could be up to 30 days late. These debts are normal and will usually not be included in delinquent portfolios for sale. There is always the exception when a company is going out of business and they are looking to sell everything at one time, but don't count on it. Portfolios including performing would, obviously, be worth more.

Sub-performing debt is debt on which payments are being made; however, they are not meeting the contractual minimums established in the initial transaction or contract. They are 30-120 days delinquent. Depending on the seller, there are times that portfolios will include some sub-performing accounts because the seller doesn't have the time, or money, to chase the accounts. These would be priced less than performing.

Non-performing debt is just that: no moneys are being sent by the debtor to the debtee. These accounts are 120 days, and more, past due, and are the ones that make up most of the portfolios that you will find for sale.

These accounts have either been already charged off by the company (usually after 180 days), or are very close to being charged off. The "charge-off date" is a very important factor and will be covered in more detail in Chapter 4, on "information gathering."
Some pools of debt with which you deal will be blended portfolios: that is, there will be a mixture of types of accounts--sub-performing and non-performing. There will also be a variety of other criteria, which we will also be addressing in Chapter 4.

Bottom Line: Non-performing portfolios are your primary targets. Turn non-performing debt into performing cash.

MINIMUMS

We're always asked about minimums. You do the math: if a funding source is willing to pay, say, five cents on the dollar (this is only an example---not a quote!) for some prime Visa Card debt...and the debt is $5000...he's going to pay $250.
The total broker's fee is usually 5%...that's a whopping $12.50 to the broker, which doesn't usually pay for the phone call to sell the debt. It's just as much work to do the paperwork on a $5000 debt as on a $500,000 debt...so who wants to bother with minnows? They'll steal your bait: we're after trophy fish!

Funding Sources will normally not even consider portfolios under $1,000,000, with an average account balance of under $1000.

The size of the average individual account in the portfolios is another factor to be considered. Simply divide the total pool by the number of accounts, and that will give you the average size of the accounts (but you knew that, didn't you?).

If the average account is too small, the pool is not profitable to try to collect. As a rule of thumb, $500 per account is about the minimum average size account that should be pursued. Over $1000 per account is much more marketable.

Ideally, look for portfolios of $5,000,000 and more. You will be a lot happier with the payday, and so will we.

Bottom Line:
Minimum size portfolio $1,000,000.
Minimum average balance $1000.
Bigger is always better.

FLOW FORWARDING

Flow forwarding is establishing an on-going relationship with a seller in which the funding source will contract to purchase all non-performing accounts on a monthly or quarterly basis.

This desirable state of affairs is created when your client is happy with the current deal you helped them make. Your client now can project this into his cash flow plans. Flow forwarding is a timesaving and profitable way to handle delinquent debt. You will be surprised to find that many companies do not know it is an available option.


Bottom Line: Flow forwarding is your future and can contribute nicely to your retirement, so watch for this opportunity everywhere!


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