Advice from someone who works on debt collection software for a living: never, ever let a check bounce. Returned checks operate in a legal loophole that circumvents most of the consumer protection afforded to regular debt. Collection agencies can begin pursuing it immediately, can begin reporting it to the credit bureaus immediately, and the interest rate they're allowed to charge on it is ridiculous.
As a startup founder who develops payment software to collection attorneys, this story really resonates!
Every account has a story behind it and the BEST way to collect is to personalize the settlement experience in a compliant, secure way
Having been in the space for only a few years, the depiction of the industry -pre 2010- seems incredibly accurate from what clients tell us.
Modern interpretation of the FDCPA is desperately needed. In 2014, contacting consumers via cell phone and email is against the law or at best a very grey area.
Sending letters via snail mail are mandated over email. Moreover, ACH payments are still preferred over Card payments… IMO, a 3-5 day settlement time should NOT be the standard way to move money in any industry.
You'd have to first define what constitutes "ethical" as distinct from "legal". If you're of the opinion that the very practice of collecting debt is scummy or unethical, then no. Assuming you will allow for at least SOME form of "ethical" debt collection, we'd have to narrow down what kinds. For instance, just off the top of my head, you've got:
- Commercial Debt
- Medical Debt
- Student Loans
- Bad Checks
Within that you conceivably have debts whose collection is perhaps ethical by nature but not ethical in practice. For instance, as I said earlier, collection on bad checks circumvent many normal collection laws, and you can thus have interest rates of 200% or higher. Another example would be Student Loans, which have their own set of ridiculous loopholes that allow the debt to persist past bankruptcy, past retirement, etc. As someone who was still in college myself only a few years ago, the idea of the financial burden imposed on me for the rest of my life simply for doing the thing that society practically strong-armed me into doing seems, to me, ridiculous; for that reason I am hesitant to call any form of Student Debt collection "ethical" simply because the laws which govern it are atrocious.
With that said, I have dealt with many agencies who at least tried to operate on an "ethical" model (usually they collected on medical debt), and they seemed polite and reasonable in their collection efforts. Remember, they're in the business to make money. Some agencies will go for the "Make the debtor's life as miserable as possible to make them pay up" tactic, which includes harassment, lawsuits, garnishments, etc. I deal with them frequently, and I think they're the scum of the Earth (primarily because they talk to me in what I imagine is the same tone as they talk to debtors). Others, however, will simply try to get what they can, and if they CAN'T--i.e. they realize that continuing to call a guy about a debt when he's already stated that he has no job and no savings would be like squeezing blood from a stone--they'll stop wasting their time and move on to an account that would be more profitable.
Much of the work done by agencies these days is not only getting people to pay, but finding out who is more LIKELY to pay so that the agency can focus its efforts accordingly. This analysis might include things like the line of business, their credit score, their location (they usually figure that areas with a higher average income are more likely to pay), etc.
To answer your question succinctly: probably. It would center primarily on whether the percentage of the portfolio that actually pays can sustain the percentage that you're willing to let go when pursuing them further would entail questionable tactics.
> As someone who was still in college myself only a few years ago, the idea of the financial burden imposed on me for the rest of my life simply for doing the thing that society practically strong-armed me into doing seems, to me, ridiculous; for that reason I am hesitant to call any form of Student Debt collection "ethical" simply because the laws which govern it are atrocious.
What happens when you don't pay your Student Loans for years and years? Since it's a "guaranteed loan", it can't actually (continue to) impact your credit rating, can it? So could you effectively decide to just "let it ride" until you die of old age, never having paid a cent of it?
If so, I think this is basically the idea behind of guaranteeing the loan in the first place: to give the people who can't pay their debt the ability to just ignore it forever.
"Guaranteed" means the government -- ultimately -- guarantees the banks that they'll get their money. But what that really means is that the borrower of a student loan lacks almost all of the consumer protections that any other borrow has. The government will garnish any wages, social security or disability checks, or anything else they can get their hands on. And that goes on until the debt is paid or you die.
People have done this. If you search around Google you can find details. Your credit is ruined for 7+ years but in default the loan stops accruing interest. The government will pay the loan off but then the government will garnish wages and tax refunds at a specific percentage until the principal is repaid.
I may be wrong, but my understanding is that (at least for the student loans I have), the owner of the debt is allowed to garnish my wages (and I have heard even social security payouts) after some amount of time in default. So I think your plan would only work for people who are willing to be unemployed indefinitely.
Sounds like a scary criteria to an entrepreneur ("you can never work!") but it might ultimately make sense for those who go to university, but end up marrying someone with a good job and becoming a lifetime dependent of them (in est, the classical homemaker.)
There are probably a few other less-common situations as well, where a person has no money of their own but access to plenty of the money of others, e.g. the "trust-fund baby."
I'm aware they are in it to make money and I don't mind them operating with reasonable margins. It just sounds like hundreds of them are willing to use the "make the debtor's life as miserable as possible" tactic.
I was mainly thinking of a cost plus model of debt repayment when I said "ethical". Trying to squeeze every last penny out of people who are [mostly] decent folks who just fucked up is the main part that bothers me, honestly.
I think that happens because they are focused on one thing: trying to get money from people who don't have it. But what happens if they help people create money that will pay for the debt? That's one of the things we're trying to do.
Absolutely possible - just need to have the right mindset and tools. As someone who started a startup that's reinventing how debt collection gets done, I see a lot of old-school collectors who'd never be able to break the mold because their financial incentives aren't aligned. They don't have the technology, thus do not have the efficiency and margin, to operate ethically. They have to make money off of fees and interest so they end up focusing on people who can pay, making their lives harder, and having them end up in worse financial standing than if they chose not to pay.
What does your question mean? Let's assume that we accept that "it is financially viable to run a possibly unethical debt collection agency". So then you must be thinking of some behaviors that the agency will not engage in, which will cut into its profitability compared to an agency which will do those things, possibly to the extent of making it not financially viable. What behaviors do you have in mind?
It might depend on what you mean by ethical. Certainly there's a world where treating people well makes them more interested in cooperating with you and that leads to a higher collection rate. I have no idea whether we inhabit that world.
Doesn't use the shady, illegal tactics + settles for less than the dollar value of the debt.
For instance, they buy it for $.05 and settles for whatever the debtor can reasonably pay that covers costs plus a reasonable margin, like 100%. So they buy it at $.05 and let the debtor pay it off for $.10 + the collector's cost.
I'd guess that is something like 25-50% of the value of face value of the debt.
You idea of doesn't sound tenable. The "ethical" agency would need an extremely high conversion rate. Something probably in the 75% neighborhood, to cover operating expenses, the 25% that doesn't convert and then a little left over for profit.
Judging by the value of write off debt (pennies on the dollar) the implicit conversion rate of collecting is probably closer to what you might see on a Facebook advertising campaign (3-5 percent??). To make that work the agencies need to charge close to the original charge off amount.
I wonder if you could run it as a non-profit, offering reductions in exchange for classes on budgeting, &c, (where appropriate) and making up some of the shortfall with donations.
What about a non-profit that purchases this debt and then targets the debtors with the tools and support to get them back on their feet to the point where they CAN pay off the debt?
Does anybody know more about this? I've seen ads for places like that and they set off my scam-o-meter, but I've never dug in to see how he scam worked.
You pay them a big fee, upfront (they know you have debt repayment issues, they're sure as hell not going to risk not getting -their- money), they contact your creditors with a form letter saying that they are authorized to act on your behalf and any communications should be through them (this is the biggest relief most people find, the phone calls, letters, all stop).
But then you get burned, because they settle all your debts, just as you could have yourself, and your credit is (even more) toasted, because yes, you'll pay less, but everything on your credit record is marked as 'settled' rather than 'paid in full'.
They have some emotional distance and apathy regarding the negotiation that might help, but there's nothing magical that they do that you yourself could not.
True. Actually, the majority of consumers that go through debt settlement end up bankrupt anyway. Some blame the fees, but I don't have data to substantiate that.
