What is a “third party” debt collection lawsuit?

These lawsuits are typically filed by the thousands by a debt buyer who possesses typically little or no documentation of the underlying debt.

1. You get a credit card, charge account, or retail loan.  The bank you have the account with is called the “original creditor”.
2. Economic distress, job loss, financial hard times.  Like thousands of other consumers, you run into hard times and have trouble making your payments.  You try to work with the card company but cannot catch up.
3. The account is then “Charged Off” after the account is about 120 days delinquent.  Once an account is “charged off” it simply means that the original creditor  has written off the debt as “bad debt” or “uncollectable” for accounting purposes. In many cases, the original creditor is then able to clear their “books” of the bad debt, take a generous tax write off, sometimes collect from “bad debt insurance” and may even sell the debt to third party debt collectors.  Charging off an account does not mean you do not owe the debt to the original creditor.
4. The original creditor sells the account with thousands of other accounts to a debt buyer. When the original creditor decides to sell these charged off accounts to third party debt collectors.  They “package” the accounts into portfolios.  Each portfolio typically contains thousands of charged off consumer accounts.  The portfolio has a “face value” which is the total amount of debt from all the charged off accounts.
5. The portfolio of accounts is sold to third party debt buyers for a huge discount off of the face value.  These third party debt buyers are also known as “junk debt” buyers.  Examples include Midland Funding, LVNV, Portfolio Recovery, Cach, and many, many more.  Usually, the junk debt buyer buys these portfolios for 5 – 7 cents on the dollar.  For example, let’s say Chase Bank has decided to sell a portfolio of charged off credit card accounts.  They package  1,000 accounts into a portfolio. These 1,000 accounts have a face value of $1 million dollars.  Remember, the face value is how much all the charge offs add up to be.  Chase Bank sells this portfolio to Midland Funding for 5 cents on the dollar.  That means Midland Funding pays only $50,000 for a portfolio of accounts with a face value of $1 million dollars.  What a deal for Midland Funding!  And typically, once this sell takes place, the original creditor is no longer involved with the account whatsoever.
6. Junk debt buyers will sue you for the full amount and sometimes more.  Just because the junk debt buyer has bought these accounts at a discount, doesn’t mean they aren’t going to try to collect the full amount owed from you.  In fact, they will sometimes file lawsuits for the full charge off amount of your account and also ask the court to grant them pre-judgment interest, post judgment interest, attorneys fees and court costs.
7. So what exactly does a portfolio contain?  Usually the junk debt buyer receives no more than a spreadsheet with thousands of names, addresses, telephone numbers, account numbers, and charge off amounts.  Basically, they receive just enough to send you letters demanding payment or to file lawsuit against you.
8. Junk debt buyers file lawsuits by the thousands.  
9. An estimated 97% of people facing third party debt collection lawsuits do not answer the lawsuit. Therefore, thousands of lawsuits result in default judgments against consumers and the debt buyers almost never have to prove their case.
10. Junk debt buyers usually do not have sufficient documentation to support the lawsuit against you.  The more documentation provided with the portfolio, the more expensive the portfolio becomes.  If 97% of the time, they don’t have to prove their case with documentation because consumers don’t file an answer to the lawsuit, why should they spend the extra money on obtaining account statements, credit agreements and other account documents from the original creditor?