The math in recessions is simple: More folks are unemployed; more folks fall behind; fewer folks are able to pay their debts once they get behind.
This time, many people can't even borrow against their home equity to pay the bills, as I wrote in "Lenders cut off the home-equity tap."
It's tough conditions like these that tempt collectors to get rough with consumers. Given that the debt-collection industry has trouble restraining itself during good times, you can imagine how bad this could get. Consider:
- Complaints about collection agencies quadrupled between 2001 and 2007, the latest data available from the Federal Trade Commission. One in five complaints received by the federal agency concerned collectors, and the total of 70,951 exceeded that of any other industry.
- Consumers most commonly complained that collectors misrepresented the character, amount or legal status of a debt -- demanding far more than was owed, insisting the consumer owed a debt that he or she did not, or claiming a debt was legally enforceable when the statute of limitations had long since expired. Other common complaints: that collectors violated laws against harassing consumers and using obscene language, that they falsely threatened dire consequences, such as jail time, and that they contacted consumers at work.
- You no longer have to be a debtor to wind up the target of a collector's harassment. As I wrote in "Sleazy new debt-collector tactics," a booming market in old and often poorly documented debts means that in some cases collectors are going after the wrong people with a vengeance.
- The industry itself realizes it has a public-relations problem that's likely to get worse. ACA International, a trade group that represents collectors, unanimously approved a first-ever code of ethics last year, and the head of one of the country's largest collection agencies has warned his colleagues that a public backlash could spoil the coming boom.
'Fresh' debts at 12 cents on the dollarVikas Kapoor, the chief executive of call-center company IQor, told a gathering of collection-agency executives in November that the industry needed to better comply with existing laws and improve the public's perception of collectors, according to insideARM, a newsletter that covers the industry.
In particular, Kapoor said, collection agencies should stop buying debt that hasn't been properly documented -- the kind of debt that triggers a lot of consumer complaints and lawsuits -- and should find a way to punish individual collection-agency employees who repeatedly violate fair-debt-collection laws.
These are fine ideas, but I'm not sure we can count on collectors to get their act together as the recession rolls through the economy. There's too much money involved and too little oversight to expect that collection agencies won't cut corners.
The boom has already begun. Sales of overdue credit card debts, already more than a $100 billion industry, are on the rise, and prices are dropping, reflecting both the increase in supply and the growing difficulty of getting borrowers to pay up in a worsening economy.
The price of "fresh," or recently charged-off, credit card debts has dropped between 10% and 30% in the past year to 9 to 12 cents on the dollar, according to Mark Russell, a director at collection-industry consulting company Kaulkin Ginsberg.
Older debts, for which two or more collection attempts have been made, have slid between 25% and 40%, Russell said, to 3 cents to 5 cents on the dollar.
Meanwhile, collectors are gearing up to go after these debts. The debt-collection industry has added 100,000 jobs in the past year, according to Kaulkin Ginsberg, bringing employment to more than half a million positions. The growth rate is expected to continue: The U.S. Bureau of Labor Statistics predicts employment in this industry to grow 23% between 2006 and 2016.
So now is the time to act. I have five suggestions for regulators and five for ordinary people dealing with collectors.