SIFs: How much is too much?
If you’re a borrower, you probably can’t get enough of Settlements in Full (SIF). Buy a flat screen for $1500 and pay it off six months later for $600. A SIF rate of 40 percent means your account is settled, and although your credit history has been hit, you can stop worrying about this one account.
If you’re a collector, you probably like SIFs as well. If your commission is 5 percent of gross collections, you’ve just made $30 on one phone call. You’ll probably be happy making calls like that all day long.
If you’re an agency owner, you’re not unlike your collectors. Five hundred settlements for flat screen TVs at 40 percent translates to roughly $300,000 in gross collections. If you own a primary agency, and your contract calls for a 25 percent contingency fee, the arrangement has led to revenues of $75,000.
If you’re a credit issuer, settling the 500 flat screen TVs at the 40 percent settlement rate brought you $300,000, minus the $75,000 fee you paid your primary agency. If more of your borrowers would not have settled for more, you’ve received an impressive 40 percent on bad bets that took place when credit was extended. Better to have less cash now than the potential for more cash later; a bird in the hand is worth two in the bush.
Unless…
The SIF rate is 50 percent instead of 40 percent, maybe fewer debtors settle, fewer collectors get commissions, fewer agency owners see revenues, and fewer credit issuers are happy with their settlement policies. Higher price point, lower volume, lack of equilibrium.
Or, if the SIF rate is 25 percent instead of 40 percent, maybe too many borrowers settle, collectors could have gotten better commissions, agency owners see less revenues than they would have, and credit issuers would have done better asking for more. Lower price point, too much volume, lack of equilibrium.
With SIF rates, an equilibrium can exist in the debt collection universe, bringing the interests of borrowers, collectors, agency owners, and creditors into alignment.
Paul Legrady is Director at ARM advisory firm Kaulkin Ginsberg, a sister company to insideARM. He recently released a whitepaper on Settlements in Full, "Settlements in Full: Debt Collection and the U.S. Economic Recovery," which is available for free download at http://www.insidearm.com/go/settlements-in-full-debt-collection.
Determining the proper SIF percentage, if any at all, is part of proper, basic negotiation. Get F&C, demand the BIF, hear what the debtor says…then decide if a SIF is appropriate. Offer a small SIF, provide solutions for the debtor to obtain the funds, get a t/o, let em think, and negotiate down as necessary. That’s all Collections 101 – if one’s collectors don’t understand the process, they surely won’t understand words like “equilibrium”.
My position has always been settlements vary from debtor to debtor. If the full balance can be recovered through litigation the subject of settlement is off the table. You do yourself and your client a disservice when you settle an account under these circumstances. I rather suspect that there is a lot of that going on in our industry today.
My experience has been that MANY debt collectors are ill-versed in the art of settlement negotiations. Its amazing how many times I’ve seen a debt collector settle for 50% on a client account with a 40% SIF floor when the debtor gladly would’ve been happy with a 80% settlement offer. When a debtor asks “What can I settle the account for ?” the immediate response should be “What are you offering? ” and then get the financials to make an informed determination.
How many supporters of the SIF issue would be willing to cut their income so their income would be reduced accordingly? I know if you collect less the drop in $ is automatic, I’m talking about a collection fee of 30% being reduced to 15% of $$ SIF. Hey, if you feel it is such a good idea what’s the problem? If the client is getting 50% of their value why not drop the collection fee 50% in all fairness?? If you SIF more than 2%, you’re milking not collecting. SIF will make it better for non~negotiators!
The concern in reducing SIF percentages in a down economy is the difficulity in moving them up in a good one. Once everyone is conditioned, overall liquidation in the good economy may never reach it’s peek.
The biggest thing I think is being ignored is the industry as a whole. Unfortunately individual offices do NOT exist in a vacuum. When I first started in collections 15 years ago settlements were rare. We offered them case by case. Debtors almost NEVER asked for them, it never even really occured to them to. We pushed it to close accounts. It worked. Now, much like a dog that you feed scraps to when it begs, we’ve trained debtors to settle.
They are aware it happens, the internet has made this info available to anyone that can type into a google text box so, unfortunately, even if a sif is a BAD idea on a particular account the debtors know that if they just blow you off the next person 1-2 months later WILL eventually settle. Either we have to accept it as endemic or as an industry agree to “untrain” this bad behavior and make settlements the exception again, not the rule.
T Dubbs – you’re more focused on quantity, not quality. You’re doing yourself, your agency and your client a huge disservice with your approach. (and even perhaps the average consumer who will eventually pick up the tab of lost revenues via higher prices at the point of sale).
“The consumer signed a contract” mentality is only dead in low yield collection agencies. It is very much alive in those agencies that know how to properly negotiate and are concerned about working each individual account for the best possible arrangement.
Debt settlement companies have allowed debtors to expect that every collector will take 40%-50% to settle. We began suing accounts that were in debt settlement programs, and all of a sudden our average settlement percentage has increased to over 75%. It depends on the average balance that you are collecting on, but filing suit is the best way to combat what debtor’s believe is their right. Nobody has a right to settle…It’s a privelage!
A lot of our major clients have floors for SIFs written into the contract or statement of work. Any proposal below that would have to be taken back to the client. This normally applies to both 1st assign and 2nd assign and, with at least one major client, tertiary assigns.
This can be advantageous for the agency since we are working to client specs and don’t have to trust individual collectors knowing when to stop the limbo. Responsibility on whether the floor is appropriate lies with the client. The drawback is when a debtor makes an offer below the floor and demands a 5 minute decision.
In the end though, we’re always trying for a PIF first and foremost.