How Changing Times Need a Changing Approach to Debt Collection

Debt collection is a tough business, and when economic recession hits, the game gets even tougher. During a recession—like the one that rocked the global economy in 2007—the number of companies with cash flow problems skyrockets. (In fact, between 2008 and 2010, there was more bad debt floating around in the collections market than at any other time in history.) But it’s not the recession itself that we want to focus on—it’s the aftermath, because in the aftermath, debtors have become savvy. They’re reusing old avoidance techniques learned during the crunch, to avoid paying today’s debts.

Doubt it?—just ask the people in working in your accounts receivable department—they’ll tell you how the number of debtors dodging repayment has skyrocketed. And it’s not just in-house collections teams that are having a tough time—as a result of canny, cash-strapped debtors, traditional collections agencies are struggling to recover monies owed. Yet this struggle doesn’t need to be endured. Collectors need to be willing to explore new approaches to collections—they can’t be bullies anymore, they have to be intelligent financial counselors, capable of guiding the debtor to the “right” choice, the choice of repaying debt. That’s done through peaceful negotiation, effective communication, and a fast, streamlined collections process. By starting off with the olive branch rather than the sword, collectors can do more than persuade debtors to repay monies owed—they can preserve fruitful client relationships.

What Does the Olive Branch Look Like?

Once upon a time, acting like a thug was an integral part of the collectors’ job description—but these days, it’s easier to catch financial flies with honey than it is to hit them with the swatter. When our firm needed to collect more than $20,000 in delinquent payments on behalf of a client during the height of the downturn, we didn’t go in “guns blazing.” Instead of threatening immediate legal action, we extended an olive branch by inviting the debtor to talk with our staff and share their side of the story. Our willingness to listen to their grievances—as opposed to bully and threaten—gave us a powerful platform on which to stand and facilitate repayment quickly without the engagement of the court.

The takeaway here is that communication is the single most effective tool in getting debt repaid.

Understanding Why Debtors Don’t Pay

There’s one reason why most debtors don’t repay what they owe:

They don’t see why they have to.

Debt disputes happen because debtors don’t agree with creditors about monies owed. Excellent communication can navigate through those disputes, get past the grievances, and get debts repaid. Successful collection isn’t about beating debtors into submission — it’s about connecting, explaining, and negotiating using an intimate understanding of the law.

Here’s a quick example…

One of our clients was owed $150,000 by a logistics company. The debtor could afford to pay – but they simply didn’t understand their legal obligations. Our client—a factoring company—was covered by the Uniform Commercial Code, a critical piece of law that most businesses simply don’t have familiarity with. Our comfort with commercial law meant we could explain in detail how the UCC covered the situation. We could show the debtor precisely how the UCC meant they genuinely had no choice except repayment. When the debtor understood the situation, they paid up. All that was needed was effective communication – backed up by commercial law. Being able to exercise patience, explain the law in-detail—why the money needs to be repaid—and work with, not against the debtor: that’s what led to $150,000 being repaid.

How to Make Debtors Sit Up and Listen

Speaking softly works best when you also have a big stick.

Streamlining your collections process is the most effective way to show debtors you know what you’re doing. Finance leaders are already streamlining their Planning & Analysis areas by using advanced models, cloud-based technology, and outsourcing to professionals. Streamlining means having a clear, reproducible process that gets results faster. One of the nastiest effects of the recession was debtors becoming accustomed to empty threats. With so much bad debt floating around, they could ignore collections agencies and expect little if any consequence. When collections processes are streamlined, consequences are clear immediately—debtors understand that your words aren’t empty, and that you mean business.

What should I look for in a collector?

First and foremost, a collector should demonstrate skill at both mediation and negotiation, which by default makes working with a law firm a better move than a traditional collections agency. Ask potential collectors about their practices, see if they’re willing to actually talk to debtors about a solution as opposed to just “taking action.” Don’t be afraid of a little gamesmanship here—create a scenario, pretend to be the debtor, and ask the collector to persuade you into repayment. Are they talking about how repayment is in your best interests? If not, you may want to keep shopping around.

Finally, before you hire a collector, ask to see their licenses and credentials—make sure everything is fully above board. Obviously when working with a licensed law firm this is less of a sticking point, but it never hurts to ask.

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