Can I buy bad debt under a sole proprietorship?

I've considered the costs of an LLC versus a sole proprietorship.

However to dig deeper, I am unaware on "who can buy debt", and where to find these regulations with a google search hasn't done me much good, it just shoves articles about debt reduction in my face.

  • 2
    It probably varies by country (you don't say where you are), and I'm no expert on the subject, but I strongly suspect "buying debt" and "starting a debt collection business" are two very different things in many jurisdictions. The former is little more than speculating in the financial markets; the latter is far more likely to be regulated as to how you go about the business of collecting debts.
    – TripeHound
    Dec 20 '18 at 7:57
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    Judging by the reference to LLC it's probably safe to assume US.
    – quid
    Dec 20 '18 at 9:01
  • @quid I also figured that, but the trend here seems to be to try and encourage questioners to explicitly state their country (where it is likely to matter), and not to let readers have to ass.u.me it...
    – TripeHound
    Dec 20 '18 at 16:23

Sure, if you want to become a customer yourself.

Your life as a consumer is largely protected from "sharp edges". Predatory practices against you are generally regulated, and you are not likely to face tens of thousands of dollars of liability due to an honest error. It's really easy to "get accustomed to that" and develop a false confidence about your actual risks.

It ain't that way in business. Businesses are the ones responsible for making a safe space for consumers, and are on the hook pretty brutally - that's the only thing that motivates them. Nowhere is that more clear than in the collections business. The industry is simply not set up for casual noobs to dabble in it. Anyone in the space is expected to operate on a large enough scale to justify the cost of learning all the tricks and all the government regs and comply with them. And if you don't, both the government and consumers have a right to come after you.

Are you on top of the credit reporting laws? Debt collection practices laws? Data security laws? Turn your back at a cafe and your laptop is stolen. It has 2000 people's dossiers and social security numbers. A bunch of credit applications get made, bills run up. Who pays for all that? One guess. Or you mistreat a consumer and he sues.

By the fact that you mentioned several types of business, I assume you know the most basic differences. What makes a C-corp, S-corp and LLC different from a proprietorship is the liability shield.

Without the liability shield, you bear personal liability for any torts (civil actions) against you, i.e. Those relating to violating the laws you didn't know about. You can declare bankruptcy, but they would argue to have their court judgment excluded from the bankruptcy, since bankruptcy is not for escaping the consequences of illegal acts.

The cost of the liability shield is a few hundred dollars and careful diligence, so it's false economy to cheap out on it.

  • I agree with everything, but your point on debt surviving a bankruptcy is more unusual than piercing the corporate veil on a single member corp. If this is about buying one person's debt or dabbling in distressed public securities you're not opening yourself to a whole lot. Though, certainly if you're starting a real business, at least put up the corp, of all the places to try to save money, that is not one of them.
    – quid
    Dec 20 '18 at 21:43

Is there some reason why you think you would not be able to?

The debtor is the one with the debt. Debtor, Frank, goes to creditor, Sally, and asks for a loan for $10,000. Sally hands debtor $10,000 and keeps a note that says Frank owes Sally $10,000. Frank never pays. Josh shows up and says "Sally, I'd like to buy your uncollected debt from Frank for $400." You buy the note that says Frank owes Sally $10,000, you don't buy the debt, that's something of a misnomer.

There's probably not a lot of liability in this business unless you intend to use a baseball bat to encourage Frank to find that $10,000 he now owes you, so I'm not sure how much the business structure would matter. But when you "buy debt" you're not loading up on debt, you're buying a mostly worthless asset for a lot less than it was supposed to be worth.

  • 1
    There's a lot of liability in this business. Dec 20 '18 at 21:09
  • I think you're both right. There may not be a lot of liability in owning debt, but there is a lot of liability and government laws and regulations surrounding collecting it.
    – Xalorous
    Dec 21 '18 at 12:54

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