Collection Industry News - Business Article - President of Stellar Risk Management on Debt Collection in a Poor Economy

President of Stellar Risk Management on Debt Collection in a Poor Economy

Recreating Your Agency's Collection Role & Perspective In These Unprecedented Times

By Steven Gan

In these unprecedented and severe economic times, with millions of people out of work and unable to put food on the table, let alone pay normal living expenses, the number of claims that are being placed at collection agencies is dramatically increasing. That said, I highly doubt that at the same time collection rates are also increasing. In my view there are two very important pillars of truth that must be fulfilled for a claim to be paid: the first is that the debtor has the will and volition to pay and the second is that they have to have the means to pay. Without these two pillars of truth being fulfilled, whether you are the greatest collector, the shrewdest attorney, or even God, you will not be able to collect the claim.

So, what should a collection agency do when it appears that the debtor has the will and volition to pay but not the means? Should they proceed with a suit? Foreclose on their home? These are often the usual courses of action, and in many cases what appears to be the only options. However, depending on the debtor and their circumstances, a more creative approach may be the way to go.

After running my own collection agency in Tokyo for 12 years (1992 – 2004), there is one thing that I learned from the debtors that have the will and volition to pay but not the means. The agent should try to provide “a payment route” for the debtor.

Well, what does this mean, “a payment route”. It means that if the debtor is unemployed or his business is struggling and doesn’t have the means to pay off the debt, then the agent should try to find a way for the debtor to minimize his expenses and generate income. Needless to say, this can be a tall and quite a different order to fulfill.

A little background on Japan’s economy: After the economic bubble broke in 1991 until about 2004, Japan’s economy was basically dripping along through a deeply entrenched recession. Blue chip companies that hired employees for life were now laying them off in the hundreds of thousands, and for the first time in post war Japan the life-time employment system began to crumble. Not only were companies laying off their employees but for a couple of years, companies themselves were going bankrupt by the tens of thousands per month. As a response to this massive unemployment and bankruptcy situation, the number of executive search firms and turn-around management companies greatly proliferated.

Not sure about what your experiences have been, but for me it’s unproductive talking with debtors who are struggling just to pay their apartment rent or staff’s salaries when they just don’t sincerely seem to have the income. So what’s a debt collection agent to do when confronted with this type of situation? Here’s a thought from my own experience in Japan.

For individual debtors who were unemployed with very little or no income coming in, we first confirmed if they were serious about finding a job. If they were serious then we proposed to have them come to our office were one of our resume writing consultants sat down with the individual, and while consulting with them about their previous employment experiences, helped them to write or rewrite their resume. Subsequently, the candidate was introduced to the most appropriate job search agency with whom we had forged a working relationship. With some luck, a position was found and the terms of the employment called for a portion of the monthly salary to be paid to the creditors. In this way the debt was gradually paid off. The result was, rather than suing on a debt that would still not materialize into cash, the creditor eventually received their money (albeit slowly).

How many of you have ever sat down with a debtor and helped them with their resume, let alone tried to help that debtor become employed? Is it possible you could imagine your collection agency actually setting up some kind of support program to help debtors who want to find work? If you think this is an idea worth exploring, talk it over with the executive search firms or employment agencies that you know or would like to cooperate with. You never know what talent people have when they come walking through your door.

Collecting doesn’t mean you must continuously badger the debtor to pay even if they can’t. Instead, it means you might want to put your credit counseling hat on and look for ways to help the debtor. I do understand that this idea goes against our natural collection instincts. However many people want to pay but they just can’t since their situation has become so economically dire. They need to hear of some kind of payment route that will lead them out of debt.

To get an idea as to the level of our success in helping debtors, let me outline the results of our efforts below.

From 1999 - 2003 we assisted 12 consumer debtors to find jobs.

The range of the debt was between $5,000 - $20,000.

The delinquency period of the debt was between 1 - 3 years.

Two debtors ended up being placed in executive positions earning more than $100,000

The remaining debtors were all found temporary jobs doing clerical, administrative, trucking, and other low paying jobs.

Five debtors completed their payments which took 1 - 2 years.

Three debtors completed more than 50% of their payments over a 1 - 2 year period but then dropped off.

Two debtors completed between 25 - 50% of their payments over a 1 - 2 year period but also dropped off.

Two debtors completed less than 25% of the original debt.

I’m not recommending this idea for every debtor but only for those individuals who are truly sincere about getting employed. At no time was any debtor assisted without first getting permission from the creditor as to this approach.

Another way to look at this idea is that rather than putting someone out on the street, it’s more socially responsible to help a person with debt problems to return to society as a constructive, productive, and tax paying member. Not only will you be providing a socially and economic option to the debtor but in the end you will be able to receive commissions not only on the repayment of the debt but also a referral fee when the debtor becomes employed -- as I had received in Japan. It's a win-win-win situation. The debtor gets employed, the creditor gets paid, and your agency receives double the commissions.

For commercial debtors having financial problems that are also serious in resolving them, think about putting your turn-around management hat on. Like individual debtors, many commercial debtors also need assistance through management and operational changes and support that lead to a payment route. At my company in Japan, we aligned ourselves with turn-around management consultants who worked with some of the commercial debtors to completely overhaul their operations, find new customers, liquidate inventory, bring in new management through stock ownership, and provide any other creative idea that would minimize expenses and generate cash flow. Here in the US we have the Turn Around Management Association (http://www.turnaround.org) and by cooperating with a TMA member in your area you may find that within six months a debtor company could possibly show signs of coming back to life.

Even one simple suggestion could alleviate a huge cash flow problem. Again, here a few examples below as to how we were able to assist some of the commercial debtors.

One commercial debtor had imported $500,000 worth of Italian belts which arrived late for the Christmas season and was rejected by the customer. My agency found another buyer to whom we could sell the belts albeit at a 50% discount. The original debt was to one of our freight carrier clients for about $25,000 the debt was paid off in full.
Another commercial debtor in the apparel industry had a huge inventory of raw textile materials and just could not find customers. We located two major customers for him, one in Kuwait and another in Dubai. His debt was back rent of about $50,000.
The third commercial debtor had $300,000 in overseas receivables in about 10 countries and by using our international collection network, we collected close to 70% of these receivables to pay off the original debt of about $30,000.

I do not recommend the above approaches to collecting a debt to every single individual or commercial debtor but only to those in which it will apply. Sometimes just providing that extra creative step can open up the payment route that will ultimately help to satisfy a debtor’s payment obligation. One very important point that I would like to emphasize is that our success in resolving certain claims through the above approaches endeared us to our clients. We weren't just the usual debt collection agency but truly added value to our services for them.

I hope the above has given you food for thought to diversify and enhance your agency’s present collection system in this very difficult economic time.

Steven Gan, CPA, and Certified Credit Executive, is president of Stellar Risk Management Services, Inc. , a credit risk management consultancy and brokerage providing products and services that increase cash flow and minimize the risk of doing business on credit. Contact Steve at s.gan@stellarrisk.com.