My clients fear debt collectors. I merely find them annoying and a minor nuisance. Rarely do either of us find the interaction interesting. We minimize even thinking about debt collection. Yet the world of debt collection is a fascinating topic with multiple layers and deep complexity.
I’ve started reading a book on this topic called “Bad Paper: Inside the Secret World of Debt Collectors.” I have read articles on debt collection that exposed the ugly underbelly of that industry. In my practice I’ve also observed with interest what I call the “other side of the file” -- where all the documents regarding collection reside. I know what to expect from experience from the major players on the other side.
So while I’m mostly busy wiping out all that debt in Chapter 7 or Chapter 13, I rarely get to reflect on what it’s like on the other side.
Yet it deserves some attention--- if you really want to understand something or someone, you need to look at it from the other side. Let’s do reconnaissance into the enemy camp and look at what the world of delinquent unsecured debt looks like.
When someone first defaults on a debt to the original creditor it goes into internal collection within 30-60 days for most lenders. If you attempt to settle the debt prior to the account being transferred to the in house collections department you’ll run into a brick wall. No one in regular customer service has any authority to settle. Only once it gets to the collections department is there a chance of settlement. By then, you’ve already damaged your credit. So that’s the price of settling it in addition to the dollars spent. Also, at that phase of the debt cycle you get a very minimal discount as the debt is still relatively “fresh” as your creditors consider recently delinquent debt.
If the debt is not collected “in-house” within 120 days, then the debt goes into a status called “charge off.” Debt collectors love to say that to debtors as if it were some special penalty that is last chance to avoid the fires of hell. All it really means is that they have to take it off their books as a performing loan. It’s something they don’t like, but it really doesn’t affect you. The shareholders of the company and federal regulations require that the lending company keep the value of its overall debts and follow procedures on nonperforming loans.
At some point the original creditor will likely farm out the obligation to a debt collector. Sometimes the collector is only an agent for the original creditor. Other times the debt is sold in a bundle with other delinquent debt in what is known as a “portfolio.” Portfolio Recovery Services is the name of one of the biggest such debt buyers. They buy these bundles of debts at a very steep discount.
Everything now is just background for future articles on how the world of debt works from the other side. These are the basic mechanisms. The more interesting stuff will be in future blog posts, in which we will find the world of debt collection is not only messy and dirty, but sometimes even criminal.