Debt-Management Advice on Bill Collectors

In 2009, U.S. con­sumer debt was $2.5 tril­lion. In Jan­u­ary 2008, more than 4% of credit cards were more than thirty days past-due. The total amount of U.K. con­sumer debt now exceeds the country’s GDP. These are just a few of the avail­able sta­tis­tics. I am sure it has only become worse since peo­ple increas­ingly need debt man­age­ment.

As a result, more and more peo­ple are likely fac­ing angry let­ters and phone calls from debt col­lec­tors. I am sure it is a growth indus­try. But most peo­ple do not know how to deal with debt-collection agen­cies and how the busi­ness oper­ates. I hope this post will help.

The first thing to under­stand about debt is that the amount of a debt and the value of a debt are two dif­fer­ent things.

“Every­thing is worth what its pur­chaser will pay for it.” — Publil­ius Syrus

Think about it like this. A base­ball card is a piece of card­board that has no intrin­sic value. If a per­son can get some­one to buy it for $5, it is worth $5. If some­one will pur­chase it for $1,000, it is worth $1,000. And so on.

The same prin­ci­ple holds true when debt-settlement com­pa­nies pur­chase con­sumer debt and then attempt to col­lect on that debt.

Here is how debt-collection com­pa­nies look at the value of debt:

After a debt is sold, the debtor now owes the full amount to the pur­chaser. Since the chances of recov­ery decrease sub­stan­tially with time, an agency might only pay 1% — 5% of face value. The agen­cies’ prof­its come from the dif­fer­ence between the pur­chase price and the amounts that are even­tu­ally col­lected. (empha­sis added)

This is what the debt-collection agen­cies do not want peo­ple to know. If the amount of a debt is $10,000 and an agency pur­chases it for 5% of the nom­i­nal value, the value of the debt imme­di­ately falls to $500. That’s all. Here is a com­par­i­son: In the stock mar­ket, the price of a stock is that at which it was most recently bought or sold — and noth­ing more.

Think about the impli­ca­tions. If a debt-collection agency can con­vince the debtor to set­tle a $10,000 debt — whose value is only $500 based on the most-recent pur­chase — for “only” $5,000 — the com­pany will have made a 900% profit mar­gin. And that is how they make their money.

Do not fall into the trap. Col­lec­tion com­pa­nies use tac­tics includ­ing harass­ment, tele­phone calls, and angry let­ters to get debtors to pay. Usu­ally, they include pleas designed to make con­sumers feel guilty through the laugh­able prin­ci­ple of “moral haz­ard.” In layman’s terms, this is the idea that “If you do not pay your debt, you are a bad person!”

Do not make me laugh. When the finan­cial offi­cers of any cor­po­ra­tion make deci­sions, they do what­ever is best for the bot­tom line. There is no such thing as “moral haz­ard.” (I could point read­ers towards friends of mine in Israel who are still owed back wages after being laid off months ago.) In the end, indi­vid­u­als and fam­i­lies are noth­ing more than small-scale, micro­eco­nomic ver­sions of cor­po­ra­tions. If com­pa­nies can ben­e­fit from being viewed as legal indi­vid­u­als, then indi­vid­u­als and fam­i­lies can ben­e­fit from oper­at­ing in a ratio­nal par­a­digm equal to that of corporations.

Here is the eth­i­cal dif­fer­ence. If a per­son owes a friend or busi­ness $1,000 and never pays, he is indeed a bad per­son. But the moment that the friend or retailer sells the debt to a third party, it becomes noth­ing more than a busi­ness trans­ac­tion in which the debt-collection agency tries to max­i­mize its prof­its while the per­son tries to min­i­mize his losses — and that is all. It is cold, ratio­nal business.

If any of my read­ers is fac­ing harass­ing phone-calls from cred­i­tors, here is my basic advice. (Legal note: I am not a finan­cial adviser, a lawyer, or any­one besides a ran­dom guy with a blog and an M.B.A. Take this advice at your own risk, and con­sult with an attor­ney first.)

• When­ever you are talk­ing with a third-party debt col­lec­tor, say this at the begin­ning: “I am record­ing this con­ver­sa­tion as well.” That should pre­vent any (ille­gal) harass­ment dur­ing the call.

• When you are on the phone, ask him this ques­tion: “For how much did you pur­chase the debt?” Of course, he will not tell you (unless he his stupid).

• So, say this: “Based on the going mar­ket rates, you likely pur­chased the debt at a max­i­mum value of 5%. So, if I owe $10,000 — you pur­chased the debt for $500 at most.” (Insert what­ever fig­ures are appro­pri­ate.) “So, I will set­tle for $600. After all, a profit mar­gin of 83% is extremely high.”

• The debt col­lec­tor will moan and com­plain since he likely earns most of his salary from com­mis­sion — but that is not your prob­lem. You are act­ing like a busi­ness. You should not care about the sadists who work in the debt-collection indus­try.

• When the debt col­lec­tor refuses at first (and he will), say this: “I can­not afford to pay any higher amount. If I can­not set­tle for this amount, I will be forced to declare bank­ruptcy, and you will get noth­ing.” (Impor­tant note: Do not threaten bank­ruptcy by mak­ing it seem that you intend merely to blow off your debt. This can con­sti­tute fraud — more on that later.)

But this is where it gets com­pli­cated. Unless you own major assets like a home or car, the debt is unse­cured — like most credit-card debt — and can­not be acquired through most legal means. (The most a debt col­lec­tor can do in this instance, I think, is gar­nish wages. Lawyers, please feel free to opine in the com­ments.) But that threat holds lit­tle water in an era of unem­ploy­ment. (If you do own a home or car, then the mat­ter is more dif­fi­cult since debt col­lec­tors can move to acquire those assets, espe­cially in bank­ruptcy. So, be careful.)

Here is the sit­u­a­tion in light of accu­sa­tions of fraud. In layman’s terms, “fraud” is going into a busi­ness trans­ac­tion in bad faith — for exam­ple, tak­ing out a loan and never intend­ing to pay it. If a per­son maxes out a credit card and never makes a pay­ment, then debt col­lec­tors can sue him for fraud (and prob­a­bly win). But if a per­son has made pay­ments on his debts for years and then becomes unable to do so because of eco­nomic cir­cum­stances, he has not com­mit­ted fraud.

Now that you know how debt-collection agen­cies works and how to set­tle debts at a frac­tion of the cost, here are other impor­tant tips to know:

• Most debts are set­tled quickly after a debt-collection agency begins mak­ing phone calls and send­ing let­ters because peo­ple become scared as a result of not know­ing their rights and how the busi­ness works. If debt-collection com­pa­nies can­not get pay­ment within a few months, they will resell the debt (again!) to another firm at (another!) frac­tion of the cost. And the process begins anew. The longer that a debt goes uncol­lected, the less likely that it will be col­lected. And debt-collection busi­nesses know that.

• As described ear­lier, if the first debt-collection com­pany pays 5% for a $10,000 debt, the value becomes $500. If a sec­ond firm again pays 5% to the first com­pany, the true value falls fur­ther to $25! Think about the lever­age that con­sumer will have at that point.

• Famil­iar­ize your­self with the Fair Debt Col­lec­tion Prac­tices Act (FDCPA) and the Fed­eral Trade Commission’s (FTC) reg­u­la­tions. The law states when and how a debt col­lec­tor and con­tact you; how to stop a debt-collector from con­tact­ing you; who they can and can­not con­tact about a debt you allegedly owe; what they can­not say over the phone; what con­sti­tutes harass­ment;  and how to report vio­la­tions of the law. More advice is here and here. Forbes mag­a­zine has addi­tion thoughts here and here.

• If the con­sumer does not set­tle, then the debt-collection agency will often get noth­ing. It is in their inter­est to set­tle for what­ever is pos­si­ble. Be tough, and play hard­ball. Nice guys do not win in busi­ness, espe­cially in indus­tries that are swim­ming with sharks.

On a per­sonal note, if a debt-collector threat­ens or oth­er­wise harasses you, my advice is sim­ple: Laugh in his face. And then quote the FDCPA back at him.

Now, why did I write this post? Sim­ple. I have grown increas­ingly sick and tired of the mid­dle class get­ting the eco­nomic shaft in the United States over the past sev­eral decades. Real wages have fallen despite increases in pro­duc­tiv­ity. Count­less retirees have lost their invest­ments and pen­sions as a result of cor­po­rate greed (see Enron and Bernie Mad­off). Young peo­ple are suf­fo­cat­ing from student-loan and credit-card debt. The upper ech­e­lons of U.S. soci­ety have ben­e­fited from tax cuts more than the mid­dle– and lower-classes. Both the gov­ern­ment and banks manip­u­lated peo­ple into tak­ing mort­gages that they could not afford and were des­tined to explode.

And few peo­ple know how to respond. Well, here is the sad truth: The mid­dle class has been nickeled-and-dimed for decades, and the only per­son look­ing out for the Aver­age Joe is the Aver­age Joe him­self. It is time for Main Street to fight for itself, and I hope this post will be a start.

Know­ing is indeed half the eco­nomic battle.