Settlements in Full: What Every Debt Collection Agency and Credit Issuer Needs to Know to Recover the Most Debt

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Settlements in Full: What Every Debt Collection Agency and Credit Issuer Needs to Know to Recover the Most Debt

Is your debt collection agency using the best strategy? This free downloadable report from insideARM.com reveals the importance of your debt collection policy.

An open letter to every debt collection agency and accounts receivable management professional:

Just as the U.S. economy is poised to recover from the long, difficult financial crisis, the debt collection industry is risking short-term gains, unaware of the conceivable long-term after-effects.

So, here’s the $64,000 question. Which is better? A or B?

(A) Collecting a greater number of repayments at a lower amount?

(B) Collecting fewer repayments at a higher amount?

It’s an issue of “settlements in full” vs. “payment in full.”

Fact: Your answer to this question, and the policy you adopt, could have far-reaching consequences.

That’s the message of a fast-reading free report from insideARM.com, a worldwide leader in providing timely news and insight on debt recovery in all industries.

Settlements in Full: What Every Debt Collection Agency and Credit Issuer Needs to Know to Recover the Most Debt is a “must-read” white paper. It asks you to consider whether credit issuers should adopt a policy, implemented by their service providers, with short-term benefits at the risk of long-term repercussions.

SIFs are a slippery slope for the debt collection industry, with very real consequences at stake.

Effective SIF policies have the potential to create indirect economic benefits that can contribute to a stronger and faster economic recovery. At the same time, ineffective SIF policies have the potential to create negative short-term and long-term backlashes, ultimately impeding the U.S. economic recovery.

Do you know the current market rates for settlements in full and the factors behind the declining levels during the recession?

In Settlements in Full: What Every Debt Collection Agency and Credit Issuer Needs to Know to Recover the Most Debt, you’ll discover:

  • How SIFs, which are growing in popularity, have some hidden pitfalls that some people in the debt collection industry fail to realize.
  • How the debt collection industry has been forced into uncomfortable territory over the course of the recession by offering debtors an opportunity to settle their accounts for a fraction of what’s owed
  • The pitfalls of accepting payment plans instead of the customary balance-in-full remittance
  • Why unemployment projections suggest that collections and recoveries will continue to remain challenging for some time
  • How SIF can maximize recoveries
  • What makes SIF policy effective and what that can mean to the economic recovery as a whole
  • How settlement rates can reach 50 percent pre-chargeoff, declining over the life of the receivable to 20 percent or less, when managed by a tertiary contingency agency
  • How debt recovery models utilize SIF
  • Factors that are incorporated into the financial models of credit issuing companies to determine whether settlements should take place, and at what rates
  • The criteria used for developing an effective SIF program

Is there a need for a more lenient SIF policy?

The accounts receivable management industry has not been immune from the most significant economic downturn since the Great Depression.

A recent survey of economists conducted by The Wall Street Journal suggests that the unemployment rate will remain well above 9 percent throughout 2010, and is not expected to fall below 6 percent until 2013. This suggests that collection efforts will remain challenging for some time.

A return to robust economic growth in the U.S. will be based on improved consumer spending and more responsible use of consumer credit. Moreover, higher chargeoffs, higher unemployment, and lower consumer spending disproportionately involve the lower middle class — the people targeted by SIF policies.

These policies present borrowers with their most feasible options to repay their debts and to become better borrowers in the future.

At the same time, an SIF policy has the potential to encourage an undesirable behavior. If you can pay off your $1,500 flat screen for $300 just five months after purchase — then why not settle your other balances in the same way given the opportunity to do so in the future?

If SIF policies have an unusually direct impact on the U.S. economy, is the effect positive or negative?

Similarly, will an SIF policy created for 2010 encourage consumers to demand the same lenient repayment terms later, after overall economic conditions have improved?

In the long run, the debt collection industry could very well suffer from a hangover effect created by ineffective and over-lenient settlement policy.

SIFs and net present value

Like other debt recovery strategies, SIFs are approached by credit issuers based on the time value of money (TVM).

For example, when the net present value (NPV) of a settlement at chargeoff exceeds the present value of cash flows resulting from more of a long-term payment plan negotiated by a debt collection agency, then all other things being equal, credit issuers should choose to settle the account with the borrower.

Of course, SIF policies adopted by credit issuers and implemented by their service providers can improve short-term financial performance for some of these companies, but potentially at the expense of others. These risks must be weighed carefully when devising or implementing a SIF program.

In the long run, effective SIF policies have the potential to contribute uniquely to the U.S. economy as it continues to emerge from recession.

But ineffective SIF policies could unintentionally stall economic growth for the entire nation.

I urge you to get the facts. Simply click the button below.

Michael Klozotsky

Michael Klozotsky
Managing Editor, insideARM.com

P.S. It is often said that the purpose of collections is to make the credit granting process more efficient, so losses can be minimized, and so credit can be less expensive for deserving borrowers.

Collections and recoveries also have another obvious benefit to credit issuing companies: to bring lost cash back onto balance sheets.

Effective SIF policies enable credit issuers to expedite the overall economic recovery by improving the borrowing capacity of consumers on whom the economic recovery rests.

And effective SIF policies can help restore some function to the consumer credit markets, and allow the credit grantors and their partners in the accounts receivable management industry to participate meaningfully in rebuilding the U.S. economy.

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