Asta Owes Success to Consumer Debts

The Wall Street Journal is offering up a profile of debt collection company Asta Funding Inc., and how it’s profiting handsomely from the new bankruptcy laws.

Competition for cashing in on distressed debt is heating up, and that may be pushing up the prices Asta must pay for bundles of bad debt. However, the Journal suggest that it?s a recession-proof company operating in an area that is easy to enter but tough to make serious money.

Asta buys portfolios of distressed receivables — money consumers owe that companies deem difficult to collect — mostly from credit cards but also some automobile and telecommunication bills, that the original creditors have bundled and sold. Unlike its peers, Asta doesn’t collect the money itself, but instead uses agencies and law firms and pays them on a performance basis, which encourages higher collection rates.

The company, founded by the Stern family more than 40 years ago, bids mostly on portfolios of at least $100 million in face value and has purchased an estimated $19 billion in face-value receivables in the past five to six years. It aims to net 150% of its portfolio purchase price over a five-year period; it collected an average of 154.4% for fiscal 2001 though 2005.

For debt collectors like Asta, the new bankruptcy laws means more people must repay their unsecured debts. It also means that more portfolios are coming onto the market because the credit-card companies — which tend to charge off accounts that are more than 90 days delinquent — only bundle and sell debt portfolios that are collectible. This means that many of those would-be uncollectible Chapter 7 filings are now collectible Chapter 13 filings, if they occur at all.

The bankruptcy law has increased the quantity and quality of these portfolios but has also roused the attention of others who see the high returns that debt collectors are registering. These new players entering the market — particularly hedge funds and other private money — is driving up the price of bundled debt. That aside, more unpaid debts means a greater supply of portfolios and that should ease prices on those bundles. Larger collectors can buy these cheaply then wait until the economy recovers, and consumers begin to prosper again, to collect.