The art of applying pressure to debtors
A project I did for one creditor started with an investigation of the current collection process. This was a series of letters (perhaps too many, but that's not the point of my story) and phone calls and legal notices with a certain number of days in between each step. It was beautifully drawn up on a coloured chart. We sat in a conference room and talked to some of the people doing the work and they agreed that the formal process accurately described what happened in practice. Then we went to their database and started looking at actual cases. None of them followed the process on the chart.
Why was this? Because along the way, the standard process was interrupted or superseded by a series of promises, followed by phonecalls to see why those promises weren't kept. Every now and then, a collector would think, "whoops, I should send letter 2", but it wouldn't be sent at the point that the chart said it should be, and because it was a month too late, in reality it shouldn't have been sent at all.
The chart really only applied to cases where the creditor couldn't speak with debtors by phone, and the debtors ignored the letters. You do need a process for that situation. Sometimes people ignore or avoid small problems until they become big enough to demand attention. If you can't talk to them, you don't know why they're not responding. For a given customer you don't know whether it's letter 1 or a bankruptcy notice that will be a big enough problem to make the debtor call you, so you increase the pressure step by step.
As a rule of thumb, if you speak to 10 customers, you will get 9 promises to pay. The customers who don't promise to pay either have a dispute or a serious financial problem and should be dealt with case by case. Perhaps 4 out of the other 9 fail to keep their promise.
In general, what collection staff need is not a hard and fast process but a set of guidelines about how to increase pressure on customers who break promises. Here are some very broad guidelines that will apply to many creditors.
1. As a general rule, collectors should seek a realistic promise to pay as soon as possible after a payment is missed. Frontline collectors need rules about how long they can give customers to pay, in the normal course of events (e.g. how long to pay without putting the account on stop). Unless that promise is outside of the guidelines or there are other exceptional circumstances, the collector should trust the customer and accept the promise.
2. When a payment promise is not kept, in general the collector needs to "up the ante" as soon as possible after the promise is broken. There should be a negative consequence. A negative consequence may be as little as another phone call drawing attention to the fact that the promise wasn't kept, or as much as commencing legal action. The collector is the best judge of what is appropriate in the circumstances.
The important thing is that the debtor shouldn't break a promise without some undesired consequence following. As with children, if you let debtors get away with things, they will keep doing them. They learn that bad behaviour is tolerated.
3. There is seldom any point in just repeating the previous consequence. Many bad debt files show a debtor receiving numerous "final demands" over the same debt. Creditors who bluff in this way are unlikely to be good poker players.
4. Having said this, no creditor wants to put customers on stop credit or send their accounts to debt collectors or repossess cars or sell houses. These things damage the relationships with the debtors and stop them from spending more money. Yes, these actions punish the debtors but they also hurt the creditors. A finance company, for example, which might be assumed by some people to 'win' by repossessing and selling a car over which it has security, will almost always lose money (often a lot of money) on a contract where it has to repossess. It would much prefer the customer to keep paying. A bank may recover all of its money from a mortgagee sale, but these are a potential public relations nightmare which they would much rather avoid. For an unsecured creditor, the equation is even worse. You punish the debtor by not allowing them to buy from you any more, so they go and spend their money with your competitors!
5. Of course, sometimes stop credits and repossessions and the like must be done, and sometimes they must be done quickly to minimize loss on an account. Good collectors walk a fine line. Delay often costs creditors money. You have to judge whether this is a temporary payment problem or a big step down the road to bankruptcy.
6. If you push a debtor too hard he may just conclude that it's a lost cause and give up on trying to pay you. You have to appear to increase the pressure at each step, without tipping the debtor over to the point where they give up.
7. Collectors have to get into the head of the debtor to judge whether he is genuine about wanting to pay. You need an appreciation for human frailty - people who break promises aren't always trying to rip you off - while avoiding being an easy mark for a dishonest person.
8. If he's genuine, is he competent? Is he capable of doing what he says he will? How can you make it easier?
9. If he's not genuine, you have to try to find the lever that will force an insincere debtor to lift this debt to the top of the pile. You have to make the debtor feel as though paying them is the easiest, least unpleasant option, (without making them think "I never want to deal with this company again.")
These things are hard to capture in a formal policy.
Peter Hattaway - www.hattaways.com - is a director of Hattaways, specialists in credit management training and consulting.