Lesson 10 of 25 · 6 min

How collection works, mechanically

A sold charged-off account is a claim that changed hands, priced from recovery versus a cheap basis.

After a charge-off the claim can be placed with a collector, or it can be sold. Placement leaves ownership with the original creditor and hires a recovery effort. Sale transfers the claim. Track 5 lesson 8 is the general fact: another agreement can reach this balance. A sold charged-off account is that fact as a change of hands.

Ashmere Collections buys the invented $6,840 at 8 cents on the dollar. The price paid is $6,840 × 0.08 = $547.20. The collector's arithmetic is recovery versus that $547.20 basis, not versus the $6,840 face. A recovery of $1,200 is a gain of $1,200 − $547.20 = $652.80 against the basis, and it is still $5,640 short of face. Face and basis are two different denominators for the same cash.

Contact rules, licensing and what a collector may do vary by state, and a reader's own situation belongs with a qualified professional. This lesson does not describe talking or not talking, paying or not paying. It describes a claim that changed hands and a basis that is a fraction of face. The $6,840 is still the face of the claim until something else, in a later lesson, reduces it.

Eight cents bought $547.20 of basis on a $6,840 face. Recovery is judged against the $547.20. Rules vary by state. A reader's own situation belongs with a qualified professional.

Key terms

Placement: The original creditor keeps the claim and hires a recovery effort. Ownership does not move.
Sale of the account: The claim changes hands. Track 5 lesson 8: another agreement can now reach the balance.
Collector's basis: What was paid for the account. Here, $547.20. Recovery is compared with this figure, not only with face.

Worked example

Eight cents on $6,840

Illustrative figures scaled down so the arithmetic is followable; they are not the reported amounts. Ashmere Collections pays 8 cents on the dollar for a $6,840 charged-off account. Contact rules vary by state.

Face of the claim: $6,840
Price paid: $547.20
Invented recovery: $1,200
Gain against basis: $652.80
Short of face: $5,640

The same $1,200 is a gain against $547.20 and a shortfall against $6,840. Basis and face are two denominators.

Check yourself

Ashmere Collections pays 8 cents on the dollar for an invented $6,840 charged-off account and later recovers $1,200. What was the basis, what is the gain against that basis, and who does a reader's own situation belong with?

A sold charged-off account is a claim that has changed hands, the everyday version of Track 5 lesson 8: another agreement can reach this balance. Open Term eight: your other agreements can reach this line →

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.