During recession, there's more and more debt available to be collected but it's harder to collect.
And that's bringing a change in philosophy to collection agencies in northern Nevada and across the nation.
John Nemo, a spokesman at the Association of Credit and Collection Professionals International, which represents 3,500 agencies from its Minneapolis office, says collection agencies have come to understand that debtors cannot pay everything they owe up front.
So the trend is toward longer-term payment plans. Many consumers can even negotiate down the amount of debt, he adds.
Northern Nevada business is up, says Todd Hunter, a collector at Summit Collection Services in Reno. The increase, he says, doesn't reflect the addition of new clients. Instead, more accounts are sent over by existing clients. Budget-cutting companies have eliminated in-house collections staff or reassigned workers to chasing new business.
"But receivables are down," he adds. "Where we collected payments of $100 a month, it's now down to $25 a month."
Summit, founded in 1992 and owned by Brian Chew, collects for everyone from funeral parlors to auto parts
stores.
In tough times, collection agencies have become picky about what accounts they will accept.
"More than ever, now is a thin bottom line for collectors," says Nemo. "People cannot pay department store credit cards; they need to put food on the table. So collection agencies are doing as much front-end analysis as they can do. They're employing technology, using algorithms and metrics to determine what debt is most effective to collect on."
That's true, too, for collection firms that specialize in business-to-business accounts.
Reno's Intelligent Business Solutions, started in 2006, handles only business-to-business collections, and
Manager William Thomas says activity began picking up a year ago.
"Many companies got through a major wave of write-offs, then outsourced those accounts they deemed
collectable," he says.
The seeds of trouble were planted in 2005 with easy credit, he says, and the firm now is collecting on a rash of contracts signed from 2005 to 2007.
Thomas and his father, Bill, a member of the limited liability firm that owns Intelligent Business Solutions, say companies owed money are in a race to get paid before the creditor goes into bankruptcy.
And bill collectors want clients to get overdue bills out for collection as quickly possible. Seventy-five days is preferred by Hunter, who says companies should bill at 30 days, begin their own collection efforts at 60 days, and call in the professionals two weeks later.
The longer a debt is left to languish, the less likely it is to be paid, but most accounts, says William Thomas, are four to six months old before they come in.
"The Wall Street Journal says that after 90 days, it drops to a 70 percent probability of collecting. After six months it drops to 10 percent. Usually after the third contact collection call, it will never get paid."
Look at a troubled company like a feed trough, Thomas says. "That trough won't feed all the piggies. Do you want to be at the front or the back of the line?"
Only 25 percent of commercial debts sent to collection are paid off, he says, while a mere 15 percent of consumer debt is recouped. But collections jump to 89 percent for companies that sent accounts out for collection like clockwork once aging reaches 120 days.
And don't count on help from the courts.
"Huge amounts in settlements are awarded to us but never collected," Hunter says.
That's bringing new tactics to the collections industry.
In the past, says Hunter, "We said, 'Ante up or we will go into litigation.' Now our clients understand that
people have no money to give. If we say, 'You need to eat this whole elephant, or we'll sue,' they say, 'OK, sue me. I haven't got it.'"
Now terms are offered when collecting debts from individuals.
"We're offering percentage plans like we never did before," Hunter says. "We say, we need 11 percent of your paycheck. Our client needs to get paid over 10 installments. If they cut your wages, as long as you're paying, our client will be happy."
Psychology plays a big role, and good collection agencies put themselves in the creditors' shoes while they seek a solution.
"Is the problem cash flow or cash management?" Thomas says. "We try to identify what is the real issue.
Sometimes not paying is due to a personal grudge against the salesperson."
While collections are more difficult, the costs of collection are going through the roof: postage, paper, computer bills, filing fees at the courthouse, the fees for serving documents through the sheriff's office.
Another frustration, says Nemo, is the 30-year old Collections Fair Debt and Collections Act, which has been outrun by technology. It doesn't address, for instance, calls to debtors' cell phones or social networking by collection agencies.
"It would be deceitful for a collector to use FaceBook, deceitful to become a debtor's friend," says Nemo.
And dunning debtors on their cell phone numbers becomes more common as consumers drop land lines entirely, even though it's a gray area legally.
The Association of Credit and Collection Professionals International is lobbying federal agencies to align consumer protection laws with modern technology.
But bill collectors say change also is needed at a grassroots level.
"A trend needs to return," says William Thomas. "Qualify customers; get a personal guarantee. A lot of companies are too afraid to ask for personal guarantees, thinking they will lose the sale. But a lot of that is a fa ade. In time, 99 percent will give that guarantee. And those who won't, you'd better wonder, why not? What have they got to hide?"
He adds, "Before the wild times, companies did due diligence. Now they say they can't afford it. We say, spend $50 up front doing due diligence. It could save far more in the long run."
As people recover from the wreckage of recession, Hunter wonders if they'll be less likely to extend credit
at all eliminating the need for agencies to collect overdue bills.
Not so, says Bill Thomas, looking back on his long years in credit management. "When times rebound, people start new businesses again. By nature, new businesses will fail within three to five years."
And so the collections cycle will begin anew.
