In today’s time, debt collection and buying almost goes hand in hand. The practice of debt being sold and collected by debt buyers has consumers aware of how to avoid collection scams. There are regulations in place to help consumers deal with 3rd party collection agencies. Rules has to be followed when collecting from consumers.
NYtimes.com shared recently that over one in seven American adults are being religiously hounded by collectors where the debt averages around $1,500. Since the US recession in 2008, there has been a rise in loan defaults unemployment ha played a big deal. Medical emergencies also come into play leaving the common household to deal defaulted loan payments.
The industry of debt buying and collecting has seen a phenomenal growth where it is estimated that about 1 billion contacts every year are done by collection agencies and revenues from 1972 to 2010 has increased 6.5 times. This can cover anything from utilities, hospital bills, student loans, and most especially credit card debts. Being able to buy delinquent loans for pennies-on-the-dollar, the debt buyers themselves sell the debt as well. This leaves the consumer talking to a collector who does not even know the history of the loan.
Debt collection and buying industry
The industry started in 1989 when the US Congress created the RTC or Resolution Trust Corporation. The main function of RTC was to sell, close or dispose of assets and charged-off debts to the private sector. To be more efficient with the task at hand, RTC started selling them in bulk to private players. They in turn started collecting from the consumers and making handsome profits.
The growth of the industry is attributed to three key factors. This has allowed the buying and re-selling of charged-off debts to grow and take steam,
- Credit availability. Around the time that the RTC was formed, there was an increase in the offerings of different line of credits from the 1990s all the way to 2000s. The most popular of which are credit cards.
- Delinquent payments. There was an increase in charged-off loans and delinquent payments of these credit tools during this time. This had a lot to do with low consumer awareness on proper credit management and financial literacy.
- Accounting strategy. Selling charged-off debts became an accepted accounting practice to salvage part of the loss and close the books on the debt. This lead to routine sale of charged-off debts to private institutions who collects from the consumers or re-sells them to other collection agencies.
There are ways to handle a debt collection agency especially for credit card debt. Charged-off credit card debt makes-up 44% of the portfolios being sold to private collection agencies. But changes in the sales practice of some banks and financial literacy on credit card use has lead to debt buyers diversifying into other debts. They are looking into car loan deficiencies, mortgage deficiencies, student loans, and even cell phone bills.
Debt collection industry components
As important as it is to for consumers to understand their rights with debt collectors, it is important as well to learn the business and players that make up the whole industry. By knowing the function of each component, consumers are better prepared to face the talk to collection agencies.
Responsiblelending.org came out with a study and included the components of the industry.
The industry consists primarily of those that purchase accounts receivables from lenders. These debt buyers is mostly represented by DBA International – the trade association for debts in secondary market. According to their data, there are about 400 members where most of them are privately-held companies.
In spite of the many members, the industry is controlled by the top debt buyers. Proof of this is that in 2008, 76% of consumer debt was bought only by 9 industry players. In a span of 3 years, from 2006 to 2009, these 9 debt buyers bought about 5,000 portfolios with face value of $143B consumer debt. Owned by about 90 million consumers, the debt buyers purchased the debts only at $6.5B which translates to about 4.5 cents for every one dollar.
The sellers are the original holders of the loans that went into default. These would mostly be the banks that offers various credit facilities and loan instruments. These could cover credit cards, mortgages, student loans, car loan, signature loans and other types of consumer credit. Apart from the banks, some healthcare providers, utility companies and even telephone companies sell defaulted accounts.
Just as the buyers, the sellers are mostly controlled by the banks. In fact, the past few years saw only 19 banks sell about $37B worth of debt to the secondary market. And about 82% of average total debt sales belong to only 5 banks.
The last player in the industry are the consumers themselves. They are the ones taking out and defaulting on the debt. They fuel the industry because of need rather than want. Some have even resigned to the fact that they will be facing debt collection by third party agencies because their debt has been sold. There is no single reason for a consumer to have lead to default. Missing the payments could be from losing a job, medical emergencies or just the lack of financial literacy.
Debt Collection Practices
Debt buyers attempts collection by either using in-house manpower or outsourcing to other agencies and even law offices. In-house efforts require a lot of people to make the collections. They are usually composed of several teams in different departments that has specific collecting functions. Some debt buyers prefer to outsource the legwork to other agencies or law firms and pay out on a per dollar collected basis.
There are a couple of methods used by debt collectors in collecting debts. Some of the most common are:
- Calls. Most debt collectors call the consumer and reminds them about the payment they have to make on a loan or credit that already defaulted.
- Credit bureaus. Some collection agencies report the debt to credit bureaus to force the consumer to make payments.
- Refinancing. Other debt buyers offer the consumer refinancing the debt. This means that they will start afresh on the total amount of the loan and start making monthly payments.
- Litigation. Most collection agencies are filing suits against the consumer in hopes of collecting the debt. In fact in, debt collection using litigation between the years 2009 up to 2013 saw a rise from $582 million to over $1B. These are just from the 4 debt buyers that disclosed earnings from filing suit against consumers.
Debt collection is now a big industry and the lack of financial literacy and proper financial budgeting is not helping consumers. Even with the Fair Debt Collection Practices Act meant to help and protect the consumers against unscrupulous collectors and addressing wrong collection processes, it is still up to the consumer to stay away from debt.
Practicing sound financial judgement and making financially informed decisions can greatly help in staying away from debt or getting out of debt. It can even lead to financial freedom all the way to retirement or in the face of emergencies. Debt collection is a by-product of financial missteps in the past that can be corrected at present to have a financially sound future.