Receivable/Accounts - Information for Credit and Collection Issues

Friday, September 11, 2020

Myths Around Collection Agencies & Debt Buying

Frequently, we get emails from consumers saying ‘since you bought this debt for pennies on the dollar …’.  Not here and there, but frequently.  Why is this?  It’s Social Media, the US collection market, and some misinformation.  Let’s clear up some of these myths one at a time...

Do Collection Agencies Buy Debt?

Yes, but not nearly as often as social media indicates. 

Most collection agencies in Canada work on a contingency basis, or bill a percentage of the amount collected on behalf of the creditor.  Through this process, the creditor retains ownership of the debt, and may assign a file to an agency indefinitely or for a fixed period.  By not selling the debt, the creditor retains their authority to authorize settlements, legal action, deal with escalations, and ultimately protect their brand reputation.

While in contingency collections, the collection agency is the point of contact for the consumer, but the creditor still drives the bus, and the agency will communicate with them on exceptions, complaints, settlement parameters, payment arrangements, bad contact information, credit reporting, and such through the life of the collection file.

Some debt is sold by creditors, after it’s been assigned to an agency (or more than one agency) but that’s a secondary process to the bulk of collection activity in Canada for debt that is under 2-3 years old.

Of the 400+ collection agencies in Canada, likely less than 12 actually buy debt.

Who Buys The Debt Then?

When a creditor does sell debt, they often send out an invitation to bid on it, and some of those debt sales can be massive – a bank portfolio for sale might be worth in the neighbourhood of $1 billion dollars.  Obviously a debt sale of this magnitude doesn’t happen every week – some creditors might sell once a year, or once every few years. 

The companies then invited to bid are often asked for due diligence (to prove they will work the accounts with professionalism and not damage the creditor’s brand reputation), and offer a price.  It may be ‘pennies on the dollar’ or a low percentage of the value of the portfolio, or it could be higher – it really depends on the projected liquidation or recovery rate expected on the portfolio.  For a debt buyer to recoup their costs, they have to recover the cost of buying the portfolio, and as well the cost of manpower and resources used to collect the debt, and ideally have a profit margin afterwards, otherwise the debt purchase was a mistake.  But the right purchase can make a large return on investment.

As mentioned above, some agencies do buy debt – but more often what happens is companies that specialize in debt purchasing buy the debt, and then assign it to a collection agency on contingency.  Which brings us back to the initial scenario of contingency collections.  The debt buyer may handle a portion of the accounts internally, or spend their time managing multiple agencies and their inventory, but in several provinces in Canada, a debt buyer must license themselves as a collection agency in order to work any accounts internally.

USA vs Canada

If you Google ‘debt collection’ or ‘debt buying’ it’s easy to see how Canadian consumers might be led to believe that debt buying is a big part of collections – because it’s huge in the USA, and many of these websites advocating consumer rights, or telling horror stories leave off the part that it is US-based.

Debt purchasing in the US is big business.  The largest debt buyer, PRA reported their Q4 2019 gross revenues at $1 billion dollars – for the quarter, with an estimated $6.8 billion revenue for the year.  And debt often will change hands – one debt buyer will collect what they can, and then resell the debt – sometimes US debt can change hands two, three, four or more times. 

In Canada, the pool for debt buying is smaller, and debt buyers are no where as massive in scope and size as in the US.  Once debt is bought, it tends to stay with the original debt buyer.

While debt buying is not common in Canada, the trend is on the rise, as more creditors entertain the idea of selling their older files in a accounts receivable portfolio.

So What Should Consumers Know?

Rather than jump to conclusions, ask the agency who owns the debt – while this shouldn’t change how the file is being collected, it can tell you who is ‘driving the bus’ as far as making decisions for settlement and legal authority.

Also, understand a debt sale contract may have provisions for what the debt buyer or their agencies can or can’t do – they may not be allowed to take legal action or report to the credit bureau, or there may be a provision for the debt to return to the original creditor under certain circumstances.

As well, don’t assume that an agency has bought debt for ‘pennies on the dollar’ and can be frivolous with decisions on an account – in many ways, debt purchasing is  taking on an additional layer of risk – a contingency agency only has to gamble the cost of its manpower vs the revenue generated from collections.  A debt buyer has the same risk, plus the additional cost of purchasing the debt to have the opportunity to collect it.  The net cost to an agency could range up to $0.20-$0.40 on the dollar when all is said and done.

Also, make sure you know your rights – each province’s collection laws may have a provision for debt purchasing and collections, and it’s important to do your research.  Here’s an overview of Ontario’s regulations:

Have any questions or concerns about a debt that has been purchased?  Drop me an email.

Thanks kindly,

Blair DeMarco-Wettlaufer
KINGSTON Data & Credit
Cambridge, Ontario

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