Buying Debts and Consignment Collections: What is the Difference

When creditors turn to collection agencies for help collecting debts, they are asking for a service requiring payment. They are looking to establish a business relationship with a collection agency willing to take on the task of collecting for them. Such arrangements can be governed under one of two models: debt purchase and consignment collections.

For the purposes of this post, I will focus primarily on monetary awards resulting from civil litigation. They are commonly referred to in the vernacular as judgments. They are a particular type of debt that tends to be handled by collection agencies that specialize exclusively in them.

Salt Lake City-based Judgment Collectors says that collection agencies can work on judgments by either purchasing them outright or working on consignment. The differences between the two models are pretty significant.

Purchasing Judgments as Assets

The purchase model is based on the legal reality that the judgments are considered assets – similar to cars, property, etc. They can be bought and sold just like any other asset. Following a civil trial, the winning party (also known as a judgment creditor) has full ownership of the judgment award.

A creditor can sell that award to a third party. Such is often the case when creditors turn to collection agencies. By selling the award, a creditor gets a certain amount of money and the freedom to not have to worry about the debt any longer. Selling gives complete ownership to the collection agency. From that point forward, the creditor has no legal interest in the debt.

Advantages and Disadvantages

The main advantages of selling a judgment include getting the debt off the books and not having to worry about collection efforts any further. The big disadvantage is sale price. Collection agencies tend to pay pennies in the dollar. They need to in order to limit their risk of loss in the event they can’t successfully collect the full amount.

Collecting Judgments on Consignment

The other option among collection agencies is to work on consignment. This is the model Judgment Collectors follows. A consignment arrangement establishes a relationship in which the creditor still owns the judgment but authorizes the collection agency to work on its behalf as a legal agent. The collection agency has all the legal authority to collect that the court order gives the creditor.

How a collection agency working on consignment gets paid is a little bit different as well. A collection agency will charge a fee based on either a flat rate or a percentage of the amount collected. But the consignment model dictates that the agency is only paid if they succeed. They get nothing if they collect nothing.

Conversely, a collection agency that buys judgments keeps everything it collects. There is no fee per se, because the agency has paid to legally acquire ownership of the judgment.

Advantages and Disadvantages

The two main advantages of the consignment model are being able to pass off the work and effort that goes into collection on to an agency and the potential of getting more money in the end. The main disadvantage is working with an agency that might fail to collect. In such a case, the creditor is right back to square one.

Both models are legitimate choices for creditors looking for help. Choosing one over the other is really a matter of priority. If it were me, I think I would go with the consignment model unless I had already been working on a judgment for a long time and simply wanted out. Faced with a similar choice, you might go the other way.