Understanding the life cycle of an unpaid account can provide an indebted Canadian with a significant advantage addressing his or her debt situation.
Creditors--and their collection agents--work unpaid accounts in an organized fashion. A Collection Manager at one of Canada's largest collection agencies once described his job as "being the foreman of a plantation" From the perspective of a Canadian struggling with debt, understanding the life cycle of an unpaid account can often be very helpful in obtaining an optimal result addressing one or more of their unpaid accounts.
This article focuses on the actions of medium-sized and large creditors. It is more difficult to predict the behavior of small mom and pop creditors. Creditors and their collection agents work hundreds--and potentially thousands and even tens of thousands of files--in accordance with a Work Plan.
A. The first six months that your account has not been paid
For the first three to six months that an account is unpaid virtually all creditors will attempt to collect the account utilizing their own employees making collection calls. These collectors are often referred to as the creditor's in-house collection department. These collectors are tasked with recovering 100 percent of the consumer's outstanding balance.
These collectors will collect the "low-hanging fruit". If a creditor's in-house collection department cannot collect an unpaid account within six months of the date of last payment then a creditor will often write-off the account. From an accounting perspective, this means that the unpaid account is no longer treated as an asset on the creditor's balance sheet. The fact that a creditor has written off an account does not mean that it has forgiven the debt or ceased its efforts to collect the account.
B. What happens to your account when it has not been paid for six months
Once no payment has been received for six months then creditors will often change tactics with respect to unpaid accounts. These may include any one of the following:
Place the account with a collection agency on a commission basis
Sue selected unpaid accounts
Sell an unpaid account to a debt buyer
1. Place your account with a collection agency on a commission basis
Most creditors will place accounts that have not been paid within six months of the date of last payment with a collection agency. These accounts are assigned on a commission basis. The collection agency will recover a percentage of monies actually recovered. If a collection agency does not recover any monies with respect to a particular unpaid account it will not receive a penny in revenues.
It is illegal for a creditor to place a particular unpaid account with more than one collection agency at any given time.
When a creditor places accounts with a collection agency it might grant the collection agency authorization to accept an amount less than 100 percent of the outstanding balance as settlement in full. In the collection industry this is referred to as the creditor's settlement parameters. In some cases, it might be possible for a consumer to negotiate a more generous settlement, referred to as a below parameters settlement. A below-parameters settlements must be submitted by a collector at the collection agency to the creditor-client and then approved by a representative of the creditor.
Placing accounts with a collection agency on a commission basis can be a very cost effective method for a creditor to squeeze some additional revenues from its bad debts. From the creditor's perspective, the key is to pay the collection agency the smallest commission possible. The term first assigns is used when an unpaid account has been assigned for the first time to a collection agency. A creditor's first assignments are placed with one collection agency for a pre-determined amount of time--often for six months to 12 months.
At the end of the period of the first assignment a creditor will recall any and all remaining unpaid accounts and may assign them to a second collection agency. These are referred to as second assignments. The commission that a creditor will pay on second assignments is higher than that paid on first assignments. The longer that an unpaid account remains unpaid the likely the outstanding balance will ever be recovered.
After a creditor recalls unpaid accounts from a collection agency working on second assignments the collection agency may assign the unpaid accounts to a third collection agency. These are referred to as third assigns. Commissions paid by creditors to collection agencies on third assigns are higher than commissions by the creditor on second assigns.
A creditor may decide to continue to recall unpaid accounts and place them with different collection agencies indefinitely. At some point the creditor may decide to sell a block of unpaid accounts to a debt buyer or possibly to sue a select group of unpaid accounts.
2. Sue selected unpaid accounts
Creditors do sue some consumers who owe them monies. They do not, however, sue all of the consumers who owe them monies.
Suing every consumer that owed monies to a creditor is a guaranteed recipe for losing money. The optimal scenario for a creditor is to cherry pick the files to be sued.
Here are six key facts about creditors suing consumers over unpaid accounts.
Creditors will not sue consumers over small balances (less than $3K or $4K)
Some creditors are more aggressive suing consumers with balances in the $4K to $10K range
Consumers owning real property in their own name are much more likely to be sued
Consumers who do not own real property in their own name are much less likely to be sued
Some consumers with good jobs may be sued (potential targets of wage garnishments)
Creditors are less likely to sue consumers after the expiry of a limitation period
3. Sell an unpaid account to a debt buyer
One of a creditor's options is to sell a block of its unpaid accounts to a debt buyer. It is becoming increasingly commonplace in Canada for large creditors--including major financial institutions--to sell their outstanding accounts to firms know as debt buyers.
There are two categories of debt buyers. The first type of debt buyer is the traditional collection agency. A collection agency is a firm that collects monies owing to others. The primary revenue source of a collection agency is collecting monies owing to others. When a collection agency purchases a block of unpaid accounts and attempts to collect them this will be a secondary source of revenue for the collection agency.
The second category of debt buyer is the pure debt buyer. Unlike a collection agency, a pure debt buyer does not collect monies owing to others. A debt buyer often has an in-house collection department. Many pure debt buyers will place their outstanding accounts with a collection agency.
My knowledge of the life cycle of an unpaid account is based upon three decades of experience in both the debt collection and debt relief industries.
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