Debt Recovery

The US government has thrown several laws on collection agencies, making bad-debt recovery harder and costlier. Lower recoveries mean, low recoveries and extensive loss for businesses and doctors. Our government’s intention behind these laws is not wrong, but the ground reality is different. 

Extra costs to comply with these laws would be passed on to businesses /creditors unwilling to pay the current expenses of hiring a professional debt collector.

There are thousands of collection agencies in the USA, but most are small. They have less than ten people and work from small offices. The following changes can result in many collection agencies shutting their businesses. 

New Regulations

1. As per FTC, starting June 9, 2023, all collection agencies will be treated as financial institutions. This means all collection agencies must secure consumer data nearly the same way as banks.
   Read: Impact of the GLBA on Collection Agencies
   
   
2. As of Nov 2021, The new debt validation notice format recommended by CFPB makes it easier for debtors to dispute the authenticity of debt. Debtors who would have usually paid quickly are now disputing the collection notices more than ever. All these delays and extra paperwork means higher cost, lower recovery, and more time to recover debts.
   Read this: https://nexacollect.com/debt-recovery/validation-letter/
   
   
3. In another CFPB order, all collection agencies must provide the balance as of a specific date and itemize all interest, fees, payments and adjustments from that date. Not all clients have this information handy. Many clients would take the loss upfront rather than wasting time digging into all the detailed documentation required to submit an account for collections. 
4. The government and even credit bureaus are creating roadblocks for hospitals, doctors and dentists, who rely on collection agencies and credit bureau reporting for medical debt recovery. Credit bureaus will soon stop reporting medical debts lower than $500, remove medical line items that have been fully paid, and collection agencies now have to wait one year before medical debts can be reported. Suppressing how medical reports are reported to the credit bureaus will surely increase the cost of healthcare, more defaults, more legal mess, and higher risk for future creditors.
   Read: Making Medical Credit Reporting Harder is a Disaster in the Making

These laws are on top of all the existing Federal and State laws. These include FDCPA, TCPA, HIPAA, FCRA, and many more.

These laws can have a positive perception of people on lawmakers, but as usual, it is making doing business harder than ever.

Simply writing off past-due accounts is a common approach among several businesses. We see this as leaving money on the table.

The primary reason for not following up on receivables is that most businesses are short-staffed, and their staff have little or no time left after completing their primary job responsibilities. Therefore, after a few initial follow-ups, they let go of their debtors.

The cost of hiring a dedicated employee to recover bills usually does not make sense because his employment costs are often equal to the money he may recover. Then why even take this headache?

Hire a Collection Agency – Minimize Defaults

Your businesses should seriously consider hiring a collection agency. Here are the main reasons for not hiring a collection agency and sending unpaid accounts to them. Many companies avoid debt collectors due to the following reasons.

1. They are not sure which collection agency to hire. They fear a collection agency’s involvement may hurt the company’s reputation. This perception is incorrect because several collection agencies have an amicable, respectful, and diplomatic way to recover the debt without harming your company’s reputation. Always go for a collection agency that has nationwide coverage.

2. Costs associated with hiring a collection agency. There is a cost of hiring a collection agency, but those costs are minuscule compared to the returns you can get.

3. Extra time will be needed to work with a collection agency. Although true, you do not need more time than you already spend trying to collect your unpaid bills. Therefore, even though you may be short-staffed, you do not need more people to work with a collection agency.

4. Data security of your customers. This is a pronounced concern, what happens when you share your data with a collection agency? Will it be kept securely or not?

This is a very genuine concern. You must ask the collection agency if they have a SOC security certificate, is HIPAA compliant, and if they have vendors located outside the USA. These simple questions can address your data security concerns.

There are several other reasons. However, the number one reason businesses are so unsuccessful with their accounts receivable is that they are short-staffed. Sending accounts to a collection agency once your B2B or B2C accounts are over 60 days past due will result in phenomenal recovery results.

Need a collection agency that is secure, amicable and easy to work with: Contact us

Things you can do internally

It is important for the company to address AR to ensure financial stability. Here are steps that the company can take to address the challenges in recovering AR due to being short-staffed:

1. Assess the Situation: Conduct an assessment to understand the scope of the issue. Determine how much is outstanding in AR and identify any trends, such as specific clients that are consistently late in paying.
2. Prioritize Receivables: Prioritize recovering the AR based on factors such as the amount due and the age of the receivable. Focus on the larger and older receivables first.
3. Communication with Clients: Reach out to clients to remind them of outstanding invoices. Sometimes a simple reminder can prompt a client to pay. Consider implementing automated reminders through email or phone.
4. Consider Temporary Staff or Outsourcing: To address the issue of being short-staffed, the company could hire temporary staff or consider outsourcing the AR management to a third-party agency that specializes in collections.
5. Review Payment Terms and Policies: The company should review its payment terms and policies. Shortening payment terms or implementing late fees might be necessary to encourage timely payments.
6. Implement Efficient Systems: Use accounting software to automate some AR processes. This can include sending out invoices, reminders, and tracking payments. Automation can help in managing the AR efficiently, even with limited staff.
7. Focus on Relationship Building: Building strong client relationships can sometimes help recover AR. A good relationship might make clients more likely to prioritize payments to your company.
8. Offer Payment Plans: For clients struggling to pay their invoices in full, consider offering a payment plan that allows them to pay in installments.
9. Seek Legal Advice: If receivables are overdue and the client is unresponsive, it may be worth consulting with a lawyer or legal team to explore options for legal recourse.
10. Monitor and Report: Regularly monitor the status of AR and generate reports. Share these reports with key stakeholders within the company to ensure that everyone is aware of the status and can take necessary actions.
11. Staff Training and Resources: Ensure that the staff members involved in AR management are well-trained and have the resources they need to perform their duties effectively.

By taking these steps, the company can work to mitigate the challenges faced due to being short-staffed and focus on recovering the accounts receivable effectively.

As per FTC, starting June 9, 2023 all collection agencies will be treated as financial institutions. This means all collection agencies must secure consumer data nearly the same way as banks.

Failure to comply with GLBA can have severe consequences for the collection agency, especially the owners and the higher management. Each violation can result in fines up to $100,000 and may extend to criminal penalties, including jail time. We will try to cover only the important parts of GLBA per our understanding.

GLBA covers your employees and even your vendors that have access to your customer and debtor data. This includes your collection letter printing vendor, your software providers that access your data, and even your Sales Representatives.  Any data access outside your company network must be secured through the VPN and their laptops should be encrypted.

If your associates can access emails through their cell-phone, you must evaluate if their emails can potentially have sensitive data and take appropriate steps to secure their mailbox or completely disable mobile access to these emails.  The GLBA Privacy Rule only applies to nonpublic personal information (NPI), including (Debtor) Name, Address, Income, Social Security number. Transaction information such as account numbers, payment history, loan balances and information from court records or consumer reports.

After the recent changes done by CFPB and these upcoming GLBA laws will result in significant operational challenges and cost additions for all collection agencies in America.

When consumers turn to a financial institution for services, they want to know that their private information is being kept safe and sound. None of us want our information shared with companies we do not approve of. The Gramm-Leach-Bliley Act (GLBA) is a law that was enacted with this desire for security and privacy in mind. The act was passed in 1999 to protect consumers’ private information within financial institutions and give them the power to choose what happens with that personal information.

What Types of Businesses Are Impacted by the Gramm-Leach-Bliley Act?

The GLBA covers any institutions that provide financial services, including:

• Handling loans
• Handling savings
• Exchanging or transferring funds
• Providing financial advising
• Investing for others
• Career counseling (of those who are seeking employment with financial services)
• Collecting debt
• Banking
• Insurance
• Credit union

The law covers a wide variety of institutions that handle finances and can include institutions one may not expect, such as car dealerships that collect and distribute the personal information of their consumers or retailers that grant credit cards to their customers.

Protecting Your Customer’s Nonpublic Personal Information (NPI)

When a consumer decides to work with a specific financial institution, they must be able to trust that institution with their private information. Often, the information given to these institutions by their customers can be highly confidential and leave the customer vulnerable to a number of personal and legal issues should their information be shared or leaked to the wrong party.

Under the Gramm-Leach-Bliley Act, financial institutions are legally obligated to protect all of their private consumer’s nonpublic personal information (NPI). An NPI is defined as the individually identifiable financial information collected by a financial institution that cannot be found in the public domain. This can include information like:

• Address
• Income
• Social security numbers
• Payment history
• Account information
• Loan balances
• Purchase history
• Credit history
• Consumer reports

Under the GLBA, a financial institution must uphold and ensure the safety, security, and confidentiality of any information their customers have trusted them with. A financial institution must always have security measures in place to prevent security breaches and data leaks. In order to ensure this, the Federal Trade Commission (FTC) has the power to audit any financial institution at any time. Should the financial institution have a need to share the customer’s information with an outside party, the customer must be made aware of the ways in which their information will be shared and given a choice in whether they would like to “opt-in” or “opt-out.”

The Gramm-Leach-Bliley Act and Privacy Notices

Whether you are opting in to sharing your customer’s NPI or not, the GLBA requires every financial institution to provide their customers with a privacy notice before a customer-business relationship has been established. Should this cause issues with the timeliness of completing the customer’s transactions with your business, there is an exception to this rule- as long as the client agrees, you may provide the notice within a reasonable time frame after the relationship has already been established.

Along with a privacy notice, customers must have an option to opt-out of sharing their NPI with outside parties. This opt-out notice must emphasize that the customer has a right to opt out, give a sensible method of opting out, and grant the customer a reasonable time frame to opt-out. The customer must also be given a copy of the privacy notice annually for the duration of the business-customer relationship.

The FTC’s Recent Amendments to the Gramm-Leach-Bliley Act

The FTC has recently made a few amendments to the GLBA. Due to this, multiple changes will become effective on June 9, 2023, including:

• Risk assessments– financial institutions will now be required to maintain a formal risk management program that includes a written risk assessment
• Designation of a single responsible and qualified individual– while it has already been required that the financial institution has designated employees overseeing the security program, financial institutions must now appoint a qualified individual to hold the ultimate responsibility of the program.
• Employee training– this new requirement means financial institutions must ensure their staff have received proper security training from qualified personnel if they have access to private information like customer names, addresses, social security numbers, and date of birth. This training must be done regularly.
• Monitor own providers to whom data is outsourced or serviced– financial institutions must monitor and complete risk assessments regarding the third-party service providers they are deciding to work and share information with. It is the financial institution’s responsibility to ensure the third-party vendors they share information with have the proper security measures to continue protecting their customer’s NPI.
• Information Systems Monitoring & Penetration Testing– financial institutions must now regularly test and monitor their safeguards, systems, and procedures for any attempts at a security breach or weaknesses
• Incident plan– a new requirement of the GLBA is that financial institutions will now be required to have a written incident response plan that addresses seven particular topics- the goal of the plan, internal processes for a response, external and internal communication, requirements for identified weaknesses, how the security event will be documented and reported, and the changes and evaluations needed to the incident plan after the occurrence of a security event
• Specified security controls– There have now been security controls added as specific requirements to maintain GLBA compliance, including access controls, system inventory, encryption, secure software development, multi-factor authentication, data retention, change management, and system monitoring
• Accountability of the responsible and qualified individual– the individual who has been designated the responsible party is now required to annually report their security program’s status to the executive leaders of the financial institution in order to maintain a sense of accountability and the motivation to uphold the highest security measures for customers.

In Conclusion

The GLBA has been put in place to protect consumers’ personal information from falling into the wrong hands. It is the responsibility of financial institutions to have security measures in place to protect their consumers and themselves. Staying up to date on the newest GLBA requirements can be crucial to ensuring your financial institution is doing everything you can to maintain compliance.

References:

https://www.fdic.gov/consumers/consumer/alerts/glba.html#:~:text=GLBA%20became%20law%20in%201999,insurance%20companies%20and%20securities%20firms.

https://www.ftc.gov/business-guidance/resources/how-comply-privacy-consumer-financial-information-rule-gramm-leach-bliley-act

https://globalcerts.com/wp-content/uploads/Whitepaper-2022-GLBA-Amendments.pdf

Assigning accounts for collections roughly 60-90 days past due for a maximum recovery rate is recommended.

The recovery rate dips as the account gets old. The following chart demonstrates the relationship between the Account-age and Recovery-Rate.

Still, there are some industries where the average recovery rate is better than others.

Based on clients we came across last year (2021), here is the average recovery rate we have seen, along with our collection agency partner(s).

This is purely our own experience. No collection agency openly publishes the results they achieve by industry. But it should give an idea of what to expect.

Industry	Recovery Rate
Transportation	84.33%
Pool Services	73.67%
Cooperative	70.39%
Propane	66.40%
Fuel/Oil	61.25%
Snow Removal	60.39%
Lawn & Garden	59.87%
Printing	58.19%
Plumbing, Heating, Air	53.30%
Engineering	52.95%
Interior Design	52.90%
Mortgage	48.11%
Travel Agent	44.18%
Distribution	43.30%
Medical / Athena	42.46%
Construction	41.49%
Publishing	40.78%
Credit Unions	40.27%
Retail/Consumer Misc.	39.72%
Pest Control	38.95%
Auto Supply & Repair	38.02%
Restoration Companies	37.73%
Commercial	36.95% – 85%
Contractors, Special Trade	36.76%
Industrial	36.38%
Optometrists	36.27%
Dental	33.29%
Repair Services	31.59%
Waste Management	31.40%
Funeral Services	31.09%
Day Care	29.55%
Business Services	29.43%
Government	28.38%
Utilities	28.36%
Farm Supply	27.52%
Auto Dealers	27.04%
Fire	26.65%
Telephone Communications	25.48%
Member Organizations	25.13%
Elementary/ High School	24.59%
Personal Services	22.83%
Schools Misc.	22.78%
CPA / Accounting	22.16%
Security	21.63%
Trucking, Nonlocal	21.34%
Clothing	20.86%
High Tech	19.87%
Veterinarian	19.25%
Advertising	19.17%
Drug Store	19.11%
Aviation	19.07%
Medical Supplies	18.03%
Rentals, Equip, etc.	17.71%
Newspaper	17.48%
Non Profit	17.28%
Hotel	17.21%
Manufacturing	17.08%
Pharmaceutical	17.00%
Wholesale, Durable	16.94%
Social Services Misc.	16.66%
Insurance	15.38%
Real Estate Management	15.34%
Media	15.22%
Bank	14.93%
Computer Services	14.90%
Bail Bonds	13.97%
Nursing Homes	13.87%
Medical Other	12.94%
College/Univ/ Prof. School	12.08%
Gym/Sports Org	11.41%
Electronics	10.25%
Legal Services / Lawyers	9.94%
Cleaning Service	9.06%
Accounting	8.40%
Moving / Storage	8.32%
Chiropractor	8.26%
House Rent Collection	6.96%

Commercial accounts (B2B) have a better recovery rate than (B2C) accounts.

 

You can legally hire more than one collection agency at a time, provided you do not assign the same account to multiple collection agencies. If one debtor starts getting contacted by different agencies, you can be sued for harassment. 

However, hiring more than one collection agency will be very hard to manage. Keeping track of which accounts have been assigned to Collection Agency “A” and others to Collection Agency “B” is always confusing. Then each collection agency has its own way of recovering the debt. Two different client portals training will be required, and each agency will have separate ways and dates when they pay you or raise an invoice to bill you. Moreover, whenever a debtor calls you directly to make a payment or discuss something else about his debt, you will have to figure out which collection agency has the account of this debtor. It can be quite confusing. 

When does it make sense to hire two collection agencies?

1. Transitioning from Agency A to Agency B: You want to fire your existing collection agency “A” ( say you are unsatisfied with their collection results). Meanwhile, you start assigning all new accounts to this collection agency “B”. Eventually, all your accounts to your old collection agency “A” complete their collection lifecycle, and you are left only with the new collection agency “B”.
2. You are a large company with multiple offices across US. You also have hundreds or thousands of accounts that require collections every month. You decide to hire collection agency “A” for one set of offices and collection agency “B” for other offices. Both collection agencies will work hard to give you better results since you are such a large account for them. They will always have a fear of losing you.

Overall, we recommend that you hire only one collection agency that is licensed nationally. Do your due diligence to shortlist the best one.

Collection agencies typically offer two types of collection services to their clients. “Fixed Fee” and “Contingency Only” services.

In the Fixed fee service, a collection agency sends multiple written demands only.

In the Contingency service, one written debt validation notice is sent, followed by collection calls from an experienced debt collector.

Although the sales guy from the Collection Agency may attempt to sell you a “Fixed Fee” service that costs around $20 an account. Fixed fee may appear more beneficial after hearing all the sales pitch, however, it may not be the best service for you. The biggest advantage a collection agency gets is that the moment you buy their “Fixed Fee” service, they have made money from you even before a single account is placed for collections. 

Unless your accounts are less than 180 days past due, the “Fixed Fee” service may be of little help. After the collection agency fails to recover money for you in the “Fixed Fee” service, they will later insist that you should transfer accounts to the contingency service.

Why go for the “Contingency Only” service?

• No upfront fee is involved.
• A collection agency makes money only if they collect for you.
• Credit Bureau reporting is done for free by most agencies.
• Calls from a debt collector are more impactful than written demands. 
• Most agencies do USPS change of address checks only in Fixed fee service. They do not perform skip-tracing, a more accurate tool for locating the debtor and his phone number. In Contingency service, almost all collection agencies rely on skip tracing.
• A debt collector can negotiate payment terms even with those tricky debtors. For example, he may put the debtor in installments or settle the amount in one lump sum payment slightly lower than the original amount due.
• A debt validation letter is sent out anyway, even during the Contingency only service; therefore your debtor knows the account is with a collection agency. So you do get a considerable benefit from this written demand as well.
• A collection agency takes all the headaches involved in the negotiation and takes money from the debtor. In a fixed-fee service, you have to be the one to manage payment acceptance and negotiation. 
• You just have to notify the collection agency of any payments received from the debtors directly to you. Other than that, sit back, and you will receive the monthly checks for the amount collected.

When is the Fixed Fee service beneficial?

In our experience, it is a better service only if your accounts are no more than 180 days past due. If accounts are less than 120 days past due, it will most likely result in significant cost savings over contingency collections.

If you want less hassle-based recovery, go for Contingency Only collections.