Finding business liquidity in bad debt

DEBT CEILING? Steven V. Frankel, president of collection agency Ashton & Weinberg, says that his company has grown each year since 2006. / PBN PHOTO/RUPERT WHITELEY
DEBT CEILING? Steven V. Frankel, president of collection agency Ashton & Weinberg, says that his company has grown each year since 2006. / PBN PHOTO/RUPERT WHITELEY

Let’s face it, no one likes to hear from a collection agency. The fact is, however, third-party debt collectors have helped keep some businesses healthy over the last several years by providing them a steady revenue stream.
At the same time, many other debt collectors have gained a reputation for unscrupulous behavior, so much so that the federal government is proposing rules to bring the industry under its regulatory role.
The issue is coming to the fore as another byproduct of the Great Recession, as many companies see uncollected receivables as essential elements of their cash flow. Across the nation in 2010, $55 billion was recovered on both consumer and business-to-business debt, according to a recent report from Ernst and Young that was paid for by ACA International, formerly the American Collectors Association.
Of the $55 billion collection agencies earned nationwide, $10.4 billion of the amount was commission for collection efforts, with $44.6 billion returned to creditors. The five states with the highest total debt collected were Texas ($5.3 billion), New York ($5.3 billion), California ($4.4 billion), Florida ($2.8 billion) and Illinois ($2.7 billion).
“I thought the amount that was put back into the economy was pretty telling,” said New England Collectors Association President David A. Sands. Sands represents about 80 members in the six New England states, only a handful of which are in Rhode Island. “The study was good to show that given a fragile economy, we are key to small businesses that are owed money; otherwise there would be no accountability. People would ignore their bills, and there would be a bigger problem.”
The study reports that the collection industry in Rhode Island directly employs 49 people and generates a payroll of $2 million. It also is indirectly responsible for about 100 jobs and $3 million in payroll. The amount of money collected and returned to the state’s economy was estimated to be $27.4 million, with about $400,000 going to state and local taxes.
Some collection agencies specialize in retail recovery, such as credit cards, while others focus on business-to-business commercial defaults. The difference between the two kinds of collection is significant, according to Steven V. Frankel, president of Ashton & Weinberg in Johnston. He previously owned a retail agency, but after selling it to a large national retail collector in 2005, he founded his new company, which has a business-to-business focus. Ninety-five percent of his clients are supply companies that provide goods and services but have not been paid. Ashton & Weinberg has five employees and is active throughout the world. Since then, he said, “we’ve grown every year since 2006, anywhere between 8 to 12 percent annually.” One type of debt he does not look to collect is from medical bills, despite the fact that more than half of all debt collected comes from health care-related debt, according to the Ernst and Young study.
“It’s almost impossible to make a living in that industry unless you make an enormous investment upfront and are well-connected with the insurance companies and doctors,” Frankel said. “If a night at the hospital costs $10,000, you end up trying to get people to pay with money that they just don’t have.”
Historically, health care has always been the leading cause of debt. Credit card and financial debt is the next highest category, representing 20 percent of debt collected. Utility/telecom, student loans, commercial and government debt each make up less than 10 percent.
According to Sands, while business has not “exploded” in the aftermath of the recession, the poor economy has had an effect.
“It’s more difficult to collect when unemployment is at 9 percent,” Sands said. In his view, the collectors are not being unreasonable. “Many creditors are trying to contact people that can pay but haven’t yet, not people that can’t pay.”
A greater problem, he said, is those companies that do not work for a fee or percentage of what they collect for the holder of the debt, but instead purchase bad debt from companies – often at pennies on the dollar – and in turn keep everything they can collect, sometimes by suspicious tactics. The original creditor is happy to get rid of the account but the new creditor has no rapport to maintain (or future business to transact) with the one in debt.
For the moment, he said, “we are regulated under the Fair Debt Collection Practices Act, a national law, back to 1977. Of course you always have issues, but it’s been pretty smooth sailing. Over the last decade, with the advent of debt purchasing and the reselling of debt after the first agency is unsuccessful, that’s what is getting the headlines, because these debts are usually really old. A [traditional] agency wouldn’t touch that. The chances for recovery are markedly less,” Sands said.
Sands is referring to companies such as NCO Financial Systems Inc., a Pennsylvania firm that recently entered into a legal settlement with 19 states, including Rhode Island, for allegations of misleading and deceptive debt-collection practices. As part of the settlement, the company committed to comply with the federal Fair Debt Collection Practices Act, the federal Fair Credit Reporting Act, and all applicable state laws. NCO was accused of collecting debts that were not owed, overestimating interest and requiring more payment than initially agreed upon.
Activities such as what NCO was doing have become so widespread that the Consumer Financial Protection Bureau is seeking to bring debt collectors under its purview, making it the first time the industry would be subject to federal supervision. The CFPB was formed in July 2011 to protect consumers and was founded as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
A rule proposed Feb. 16 would apply to debt-collection agencies that collect $10 million or more in annual receipts, or about 175 national firms that account for 63 percent of the debt collected in the United States each year. Comments on the rule are due by April 17, and the final rule must be issued by July 21. •

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