The most important thing creditors should do is to have a good bankruptcy notification process in place, so that they can stop credit card use or shut down accounts that have open credit. They can also be aware of multiple filings if they have a notification process in place.

For larger balance accounts, they will want to review the bankruptcy schedules and the plan. If a customer’s loan is for property that is mostly in a vacation home area, creditors can make sure that the property is listed properly in the schedules, and if they aren’t they should contact the Trustee immediately. If your customer deals largely with commercial debt, they should watch these accounts extra closely, especially those with large balances,  because businesses are where the larger bankruptcy fraud cases take place; and it usually takes place in conjunction with other white collar crimes.

In particular, creditors should watch for the following bankruptcy fraud warning signs:

• Concealment of assets
•  Multiple bankruptcy flings
•  Unusual depletion of assets shortly before the bankruptcy filing
•  Unanswered questions or incomplete information on debtor’s schedules and statement of financial affairs
•  Frequent amendments to schedules, statements of financial affairs and monthly operating reports.
•  Inconsistencies among recent financial statements, tax returns and debtor’s schedules and statements of financial affairs.
•  Frequent dealings in cash rather than recorded transactions
•  Transfer of property to relatives or a real estate management company
•  Payoff of loans to family members

In the end, it’s really a case-by-case decision on whether to report bankruptcy fraud. If your balance is small, is it worth having your name in the news for going after a consumer?

Bankruptcy fraud cases are investigated by the Internal Revenue Service’s Criminal Investigation’s Bankruptcy Fraud Program. Cases are then referred to the Department of Justice for prosecution

If you report, you need to make sure to have enough proof so that the IRS can do its job and take the action needed to bring the fraudster to justice. If you do suspect bankruptcy fraud, and do want to report it, information can be reported to:

USTP.Bankruptcy.Fraud@usdoj.gov

Or by mail to:

Executive Office for U.S. Trustees
Criminal Enforcement Unit
20 Massachusetts Avenue, NW
Suite 8000
Washington, DC 20530

There are 4 main types:

1. Concealment of Assets:  This is the most prevalent type of bankruptcy fraud and constitutes approximately 70% of the bankruptcy fraud that takes place. Concealment of assets happens when a person either hides assets (property, vehicles, etc.), or transfers them to another person just prior to filing bankruptcy. Concealment of assets is on the rise because of the new “means test” that a person has to go through before filing for bankruptcy. For the means test, one thing a person has to prove is that they don’t have enough assets to pay off their debts. While they are not required to sell their primary residence or their main mode of transportation in order to pay their creditors, things like vacation homes, cabins, boats and collector cars could be considered an asset that could be liquidated in order to pay off creditors. If the bankruptcy debtor wants to keep these things they will often times try to hide these assets or temporarily transfer them into someone else’s name.
2. Multiple Filings:  Multiple filings take place when individuals file for bankruptcy in more than one state, using their real names and information (such as Social Security Numbers), false names and information, or a combination of the two to file the claims. The filers tend to list the same assets on each fraudulent claim but deliberately fail to include every asset. This, like concealment of assets, fraudulently protects their valuables from total liquidation when debts are paid. Another type of multiple filing occurs when a debtor files one bankruptcy right after another in order to not pay a debt that was found non-dischargeable in a previous bankruptcy filing.
3. Petition Mills:  Petition Mills are a fraud in which the perpetrator poses as a financial advisor, sometimes as a credit counselor or paralegal, filing hastily-prepared bankruptcy documents in the name of victims who come to the advisor as clients. The bankruptcy filing is often both incomplete and inappropriate for the victim’s condition; and, often, the victim does not even realize that a bankruptcy has been filed. This happens a lot in situations where the debtor is about to be evicted, and the perpetrator proposes to help them avoid the eviction. This also happens a lot in situations where the victim does not speak English.
4. Bustouts:  A Bustout is conducted by a company that is set up to fail from the outset. The operator obtains merchandise from creditors, disposes of the goods (usually for cash), does not pay suppliers and then files bankruptcy. Another type of  Bustout and one that that our credit card clients would generally see is a debtor who racks up high bills on luxury items on credit cards and then files bankruptcy shortly after the items are purchased.

These are the most common types of bankruptcy fraud, but how should creditors address the problem? We’ll tackle that in our next post.

There were just over 1.4 million bankruptcies filed in 2009 and almost 1.6 million filings in 2010. The Bankruptcy Act change of 2005 was meant to reduce the number of people filing for bankruptcy, and for those who did file, it was meant to push more towards chapter 13 so they would repay their creditors rather than discharge their debts in a chapter 7. However, just 5 years after the Act went into effect, we are back to pre-2005 filing rates, and even higher. Additionally, as a result of some of the changes in the act, a new situation is coming forward; bankruptcy fraud. According to the Department of Justice, approximately 10% of the bankruptcy cases filed contain some sort of bankruptcy fraud.

While creditors can be pro-active and monitor for bankruptcy filings, bankruptcy fraud is something that isn’t as easily detected. Even if they know the warning signs to look for, it is often too much work to try to bring a fraudster to justice.

If the Department of Justice’s figure is correct, and 10% of the case field has some sort of bankruptcy fraud, that means that in 2009, when there were 1.4 million cases filed, there would have been 140,000 cases of bankruptcy fraud. However, according to figures posted by the IRS in 2009 only 18 investigations were initiated and only 13 people were sentenced.

So why don’t more people get prosecuted for bankruptcy fraud?  Well first, they have to be caught.  Bankruptcy attorneys and trustees take the debtor at their word when they file for bankruptcy. They generally don’t do any checking for assets. Although more recently, trustees have been starting to dig a little deeper to look for assets on chapter 7 cases. This is because the rules have changed as to how trustees get paid for chapter 7 cases. It used to be a flat fee, but now they are given a percentage of the assets they find that can be liquidated.

Another reason that more people aren’t prosecuted is that they simply aren’t reported, or if they are reported there isn’t enough information available to proceed. While the reporter of the fraud doesn’t have to give their name or company info, if they don’t give that info, and there isn’t enough info to proceed, the IRS will simply drop the case. If the reporter gives their name or company info, then there is a chance for bad press if the info gets out to the public. So much of this fraud continues to go undetected.

For these reasons it is absolutely critical that creditors understand that risks of bankruptcy fraud, and the steps they can take to try to mitigate them. In our next post we’ll look at the 4 common types of bankruptcy fraud.

The economic downturn that began in 2008 dramatically changed the lives of consumers and the future of many businesses. It also significantly altered the landscape of the receivables management industry and created a new normal for those businesses. While the U.S. seems to be in a recovery period, market conditions and collectability are still in flux due to the economy. Collection professionals are facing changes in their portfolios due to the new mix of business and the volume of collectability, and legal and compliance challenges continue to mount.

In many respects, 2011 has mimicked 2010, and it seems 2012 is poised to be another year of the same. Unemployment continues to remain in the 9 percent range and shows no signs of decreasing. Liquidity is down from traditional norms of anywhere from 25 to 50 percent, depending on type of debt.

Historically, consumers would either raid their savings accounts or use their home equity to pay off debts. However, in today’s market, consumers have exhausted their savings—many have even dipped into their retirement funds—and homes no longer have equity. In addition to the problem of liquidity, the volume of debt against which consumers can collect is also starting to shrink. For collection professionals, this is the worst-case scenario—there are fewer accounts to collect against and the liquidity consumers need to repay their debts has rescinded.

Another reality of the new norm is the heightened focus on regulatory compliance and the associated scrutiny that comes with it. Both the federal government and state lawmakers are enacting new legislation geared toward further protecting consumers. The federal government recently created the Consumer Financial Protection Bureau, which is tasked with rulemaking, supervision and enforcement of federal consumer financial protection laws, as well as taking consumer complaints. Many states are going above and beyond federal measures as well.

Many collection professionals and businesses are succeeding in this new reality, largely by accepting that success means doing more with less. Right now, the ability to effectively maintain and grow a business and do more with less in the receivables management industry is dependent upon changing your business strategies, specifically:

• Improving your technology and adopting new technologies.
• Gathering and using increasingly advanced insight about consumers.
• Stepping up efforts in risk mitigation compliance.

 Investing in Technology

When the economic downturn began, businesses pulled back on their investments in technology. This reaction occurred predominantly because technology upgrades require capital investment, and other priorities took precedence. As a result, many businesses are using legacy technology platforms that restrict the ability to drive efficiency and automation.

Every organization can benefit from streamlining processes, increasing automation and optimizing efficiencies.

In order to achieve the benefits of more advanced technology capabilities and features without the capital investment, many businesses are turning to cloudbased technology.

The benefits of cloud-based technology include minimal upfront capital investment coupled with minimal set-up and implementation time. This allows collection agencies to replace or enhance their current platforms more quickly while managing costs more effectively. Cloud-based technology also offers the option of moving your entire platform onto the cloud or augmenting your current system with new “bolt-on” functionality to extend its life.

Adopting cloud-based technology also enables collection businesses to increase their effectiveness by taking advantage of market opportunities. For example, right now data security is a huge priority for individuals and businesses alike. Many legacy technology systems don’t adequately address security concerns, and implementing a new system through traditional means (via hardware and software purchases) can take up to a year. By moving to cloud-based technology, a collection agency can add new customers by showing that it provides greater security coupled with greater efficiency. In addition to gaining new customers, agencies will reap other rewards—increasing security comes at a high cost that clients aren’t willing to pay, and cloud-based technology offers a way for collectors to absorb this cost in a way they can live with.

Consumer Insight

In the credit and collection industry, you often hear people talking about the need for more data. The truth is, it’s not more data that’s needed—it’s more insight into the data. Understanding consumers and their behaviors can drive your competitive advantage. The key is to gather more insight by working with fewer people. There are more benefits to be gained by consolidating data suppliers and working more closely with a select few to leverage the data they provide more fully. Insight comes in different forms, but it starts with understanding the individual with whom you are dealing.

There are four primary consumer categories that collectors (from both a first- and third-party environment) may encounter in their recovery efforts:

• Slow Payers: Slow payers are habitually behind on payments. There are many historical reasons for slow payers (young people tend to pay slowly early in their credit lives, for example), but since the onset of the recession, this group has expanded. For instance, many consumers have been turned into slow payers by a loss of income or extraordinary debts—such as a large medical bill—exacerbated by economic stagnation.
• Consumers with Willingness but No Ability to Pay: This is arguably the group that has expanded the most since 2008. These are individuals who really want to honor their obligations but do not have the resources to do so. Unemployment is the main driver here.
• Consumers with Ability but No Willingness to Pay: These are people who are trying to work the angles to avoid debt payments. These consumers, despite full employment and minimal deterioration of assets, will try everything to avoid paying what they owe. They also tend to be very savvy when it comes to credit use and collection practices.
• Credit Criminals: This group includes fraudsters, habitual offenders and professional litigants. Individuals in this group—which is rapidly growing, thanks to the Internet— often never pay, even with a legal judgment.

Actionable insight leads to understanding what type of consumer you are dealing with, and in turn this allows for segmentation, prioritization and setting a strategic course of action. If a consumer is single, doesn’t own any assets and has had four addresses in the last seven years, you can assume he or she is going to be harder to contact than someone who is married with two children, owns a home and has relatives living nearby. The difference in these two individuals is stability, which often correlates with contactability—and contacting a consumer is the key to debt repayment.

Another example of actionable insight is staying abreast of trends. According to Monster’s 2009 and 2010 Annual Job Survey, 40 percent of college graduates who have graduated in the last five years are living at home with their parents. Knowing this, if a collector is trying to locate a 25-year-old consumer, obtaining contact information for not just the individual but his relatives will likely yield the best results.

Valuable insight is not limited to individuals; insight into the market helps businesses with their strategic planning. For instance, the fact that the volume of bankcard debt has dropped tremendously has led many receivables management firms to redo their business plans to include seeking out new customers in different industries. The collection firms that are able to grow their businesses right now are doing so because they are diversifying into other types of debt, such as health care, municipalities, telecommunications and utilities.

Ultimately, insight provides collection agencies with the ability to segment and prioritize across the business with the goal of focusing limited resources—time, money and effort—to drive the best results.

Risk Mitigation

 Certainly, there is always a level of risk in the business world. However, in the receivables management industry, risk has spiked in the last few years due to heightened regulatory compliance, increased scrutiny and the financial ramifications at play. Collection professionals are actively looking for ways to reduce or better manage their risk. At the core, improved risk management comes from having better controls in place coupled with a better understanding of the strategies you are invoking.

Traditional reporting and tracking used to be enough, but it’s not anymore. In today’s world, for every action or step taken, a collection professional must note what occurred and have rules in place that allow for quick course correction if needed.

The ability to implement more advanced controls comes from having an infrastructure in place that continuously takes into account your collection strategy and tracks the details and outcomes on each interaction with each customer. Monitor at a granular level and adjust quickly when needed. Without the proper metrics tracking, strategy monitoring and associated controls of real-time risk mitigation, a collection firm is highly exposed to legal action, financial penalties and reputational damage.

Collectors who can leverage the latest technologies, drive greater insight and optimize operational effectiveness while mitigating risk are the winners in today’s new norm. Anyone operating in the receivables management industry who doesn’t adapt will have limited longterm success.

The thought is that having “all of your eggs in one basket” is a bad thing. But the challenge for most agency owners who are grappling with this decision is how long it will take to actually execute.

For collection agencies focused on the credit card sector, in most cases, it took them a couple of years or more to obtain the business from one of the top five credit card issuers, and those years included many hurdles: the endless phone calls/meetings, dealing with attrition within the recovery department, endless paperwork, meeting data and physical security requirements, obtaining SAS70 or PCI certification, waiting for volume to finally be placed, working their way to better volume that is more collectible, etc. Those that have done it know exactly what I am talking about.

When a collection agency finally lands a big client, the hope is that it is going to be profitable in 6-9 months and this client will act as the next reference to obtain the next big issuer logo. Once you have obtained them as a client and have gained all of this experience preparing to service them, now how do you then leverage it into another asset class?

Building your brand and establishing yourself as a player in a completely new asset class requires an action plan and a capital commitment on the agency owners’ part. With a different work flow and collection techniques, a whole new set of decision makers to build relationships with, and many other variables, any move will take time.

Diversification Options

Agencies who are being impacted by the volume declines in the credit card sector are considering the following options:

1. Leverage the existing platform, relationships and prior collection experience into a complementary vertical such as auto or student loans.
2. Focus on going after business from well-capitalized debt buyers that are buying volume your agency has experience servicing.
3. Hire a sales person who has a network of contacts in another vertical.
4. Purchase debt either on a forward flow or one-off basis from its existing credit card clients to tie them into a relationship.
5. Merge with another agency to become a larger and more scalable player in the eyes of the credit card clients.
6. Make a strategic acquisition to enter a new vertical market.

After you’ve made the move, the really tricky part starts: successfully collecting on a new debt type. Consumers treat their credit cards much differently than their cell phone bills. All of a newly diversified collection agency’s internal processes will need to be reworked to accommodate a different type of debtor. This will require new investments in training, and even hardware and software.  But if it were easy, everyone would do it, right?

Michael D. Lamm advises owners on their growth and exit strategies for Kaulkin Ginsberg’s Strategic Advisory team. Michael can be reached directly from Kaulkin Ginsberg’s Philadelphia office at 240-499-3808 or by email. You can also read his blogs on insideARM.com.

So what’s the decline we’re talking about? Simply: total credit card debt outstanding fell more than $180 billion from mid-2008 to May of this year. Charge-offs certainly had a huge impact on this decline, as average writedown rates at all banks topped 10 percent for four straight quarters from Q3 2009 through Q2 2010. But I also think that those consumers who can pay down debt have been attempting to do so.

These individuals – we’ll call them “payers” – are who all collectors look for when placing calls: those willing and able to make debt payments. Recently, many have been forced into this behavior due to the nature of the card market (lower credit limits, attractive consolidation options, etc.). But these people are still payers.

It’s the non-payers that ARM companies worry about.

I’ve identified four primary debtor categories that collectors (from both a first and third party environment) encounter in their recovery efforts, and ways to deal with each:

Slow Payers – Traditionally speaking, slow payers are habitually behind on primary payments and arranged payments. There are many historical reasons for slow payers (young people tend to pay slowly early in their credit lives, for example), but since the onset of the recession, this group has expanded. Normally-prudent debtors have been turned into slow payers by loss of income, or extraordinary debts – like a large medical bill – exacerbated by economic stagnation. Since slow payers are still payers, gentle, frequent reminders to pay often work best.

Debtors with Willingness but no Ability to Pay – Probably the group that has expanded the most since 2008, these are people who really to want to honor their obligations but honestly do not have the resources to do so. Unemployment is the main driver here.  Legitimate members of this group naturally engender empathy from collectors, and as a strategy, recovery efforts should focus on an empathetic approach. More long-term payment plans, post-dated checks, and patience will do the trick.

Debtors with Ability but no Willingness to Pay – These are people who are trying to “work the angles” to avoid debt payments, despite full employment and minimal deterioration of assets. These debtors are very savvy when it comes to credit use and collections practices.  As such, they may use phrases like, “Where’s my bailout,” threaten bankruptcy action, or launch into lengthy prosecutions of the legality of debt itself. Regardless, they are putting up verbal roadblocks to paying. Firm reminders that their debt is legal and that they do owe it tend to work here. If not, there’s always the legal channel.

Credit Criminals – This group includes fraudsters, habitual offenders, and professional litigants. If you identify members of this group – which is rapidly growing thanks to the Internet – avoid them at all costs. They will not pay…ever. Even with a judgment. For credit criminals, effective account scrubbing tools that search for lawsuits and incarceration can help.

There is no silver bullet for every type of debtor out there. However, by gaining more insight about which of the above categories a debtor most likely falls into will help collection strategists chart a course for their frontline workers.  With that said, many firms are employing “listening and learning” techniques and are leveraging  multiple external data sources (public records, demographic / lifestyle data, and credit data) to help them better segment their debtors into these primary debtor types.   Once the accounts are segmented into the four debtor types, the key is continuous champion / challenger testing of different collection approaches for each debtor segment, in a never-ending effort to optimize collections results.

Rob Fite is the Vice President of Collection Solutions for LexisNexis® Risk Solutions, and brings with him nearly 20 years of experience in the fields of collections, credit, and risk management. At LexisNexis, Rob is responsible for leading LexisNexis collections market strategies, product development, business direction and revenue growth.

EDITOR’S NOTE: This article originally appeared in Know Your Debtor, a FREE quarterly email newsletter published by insideARM and LexisNexis that focuses on understanding trends impacting consumers.  To view the most recent issue of Know Your Debtor, please visit http://www.insidearm.com/newsletters/know-your-debtor-9-29-11/. To receive the newsletter, please sign up at http://www.insidearm.com/go/subscriptions. For more insights on trends that impact consumer payments, please visit www.debtcollectioninsight.com.

Housed within (and funded by) the Federal Reserve, the CFPB will have greater powers than its regulatory predecessor, the Federal Trade Commission. The new agency will be able to write binding rules rather than simply make recommendations to Congress, although it should be noted that any changes to the Fair Debt Collection Practices Act (FDCPA) will have to be made by Congress.

The initial focus of the CFPB and how it will regulate the ARM industry has been the subject of much speculation. And while the agency has not tipped its hand, proposals and testimony put forth by several groups over the past couple of years could provide some insight into the direction the new regulator may take.

Some of the most likely changes to federal laws and regulations to occur over the next two years include:

• Stricter documentation requirements for the filing of collection lawsuits,
• Stricter documentation requirements for the sale and purchase of consumer debt,
• New specific requirements for initial consumer communications, to include more robust information about the origin of the debt in question,
• Codified clarification on the use of e-mail, most likely defining an e-mail as a collection letter not eligible to be the initial communication, and only permissible with express consent,
• Clarification on the use of user-fee communications, like mobile phones and text messaging,
• An explicit definition of how many calls over a given period constitutes “harassment.”

The FTC Has Already Done Plenty of Research

In April of this year, the FTC held a one-day workshop to address the complex changes in consumer communication technology that have taken place since the FDCPA was enacted 34 years ago. The workshop, formally titled “Debt Collection 2.0: Protecting Consumers as Technologies Change,” focused on advancements in mobile phones, social media, and e-mail, and the increasing amount of consumer information that is available on the Internet.

This workshop came after two separate 100+ page reports were created by the FTC to address imminent changes in the FDCPA and collection rules. Collecting Consumer Debts:  The Challenges of Change:  A Federal Trade Commission Workshop Report was published in early 2009 after a 2007 workshop to address the state of consumer debt collection. Feeling that the workshop did not adequately address the legal debt collection process, the FTC convened another series of workshops in 2009, resulting in the 2010 publication of Repairing a Broken System: Protecting Consumers in Debt Collection Litigation and Arbitration.

Although both reports contained many recommendations, no actions were taken to update or improve debt collection laws and regulations because the proposals came from the 30,000-foot level. The 2011 technology workshop was more granular, focusing on narrow issues that arise from new technologies. (For example, there was an in-depth discussion of the Foti conundrum at the workshop). But there has still been no report or recommendations published from that event.

The CFPB will be relying heavily on the work of previous regulators. As such, it can be assumed that much of the FTC’s research will be absorbed rather than duplicated. Since much of the FTC’s research focused on improving the debt collection litigation process and making accommodations for new communication technology, it would make sense that the CFPB would move first on those consumer protections.

Other Groups and Governments May Provide Insight

After seeing the “big picture” recommendations from the FTC, ACA International – the largest membership organization for credit and collection professionals – issued its own set of guidelines for collection law reform. The ACA published its own proposal document that laid out five areas for improvement in collection laws, with recommendations.

The proposals included:

• The FDCPA should be amended to allow collectors to communicate with consumers by any method of communication available,
• The TCPA restrictions on the use of an autodialer or prerecorded message to call a consumer’s mobile phone should be amended to limit their application to telemarketing calls,
• The FDCPA should be amended to specify the precise language that a collector can leave in a voice-mail message without violating the law,
• The Truth in Lending Act should be amended to require original creditors to maintain consumer account information for no less than seven years from the date of charge-off.

While the ACA proposals are more specific than those from the FTC, rule makers at the CFPB will probably be reticent to accept the recommendations of an industry group without significant alteration. Instead, the CFPB might look at states and courts and their recent moves to amend collection laws and rules.

In February 2011, a state appeals court in Illinois ruled in favor of a defendant in a debt collection case. But in its ruling, the three-judge panel wrote that collection agencies filing a lawsuit to collect a claim on a debt buyer’s behalf must include copies of all previous owners, the date of assignment to those owners, and the amount paid by the debt buyer. The case is sure to have an impact on collection suits filed in Illinois, and may provide direction for federal standards.

A bill in the California Senate with similar requirements got deep into the legislative process before stalling in June. The bill required certain disclosures about the debt’s age and consumer obligations to pay, imposed strict penalties on violations that could not be waived, and would have allowed no cap on class action lawsuits against a buyer.

In December 2010, New Mexico’s attorney general passed a new rule that requires debt collectors to disclose to consumers that their debt is not enforceable by lawsuit if it is beyond the debt statute of limitations.

Expect Quicker Action

The ARM industry has been expecting FDCPA and other collection law reforms for a long time. But for various reasons, the FTC and other federal agencies have been slow to act. The CFPB, with the benefit of new energy, is not likely to drag out the process further. Even though the new agency will be very busy with products like mortgages and credit cards, as long as debt collectors top complaint lists year after year, the group will have the motivation to make quick changes.

EDITOR’S NOTE: This article originally appeared in Know Your Debtor, a FREE quarterly email newsletter published by insideARM and LexisNexis that focuses on understanding trends impacting consumers. View the most recent issue of Know Your Debtor at http://www.insidearm.com/newsletters/know-your-debtor-9-29-11/. To receive the newsletter, please sign up at http://www.insidearm.com/go/subscriptions. For more insights on trends that impact consumer payments, please visit www.debtcollectioninsight.com.

Below are some general national bankruptcy demographics*:

• Average age of 38
• 44% couples
• 30% women filing alone
• 26% men filing alone
• Slightly better educated than the general population
• 66% have lost a job
• 50% have experienced a serious health problem (75% of which have health insurance)

One way to predict the potential for a bankruptcy filing is to regularly conduct data monitoring or to use a solution that can provide alerts when certain actions are taken. The primary reasons for bankruptcy filings are medical issues, job loss/unemployment, divorce and foreclosure and data monitoring and/or alerts can monitor for these events to alert collections professionals to the potential for a bankruptcy filing. Creditors should also look for these warnings signs – if on a customer service call a debtor mentions a trigger that is a sign for a potential bankruptcy filing, the creditor should consider policies moving for settlement rather than arranging a payment schedule.

Even with a plan in place to detect and prevent bankruptcies, they will still happen, and if the current data is any indication they will begin happening with increasing frequency in the coming years. When a bankruptcy occurs the most important step is to properly identify and quickly handle the account. To have any chance at recovering debt on a bankrupt account a collector or creditor must a submit a Proof of Claim form along with any necessary documentation within the required time frame (usually 90 days from the 341 meeting for non-government debt). The reality is that in every case there is a limited pool of bankruptcy dollars available for distribution and the monies that are paid out are often decided on a first-come-first-serve basis. Technology-based solutions offer a distinct advantage in allowing companies to more easily and efficiently submit Proof of Claim documentation and to collect on bankrupt accounts.

The bottom line is that the more information a collector or credit is able to collect the better they can work with a debtor find ways to avoid bankruptcy. When a bankruptcy does occur an effective Bankruptcy Management Program can automate and streamline the steps that need to be taken to minimize manual involvement and will enable a creditor or collector to generate and maintain an ongoing collections stream.

Download our free white paper on bankruptcy management.

*Elizabeth Warren, The Fragile Middle Class: Americans in Debt, Harvard Law School

In addition to understanding shifting consumer attitudes, debt collectors must also take into account state and federal legislative responses to economic conditions in the U.S., and decisioning trends among credit grantors. For example, The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 seeks to establish fair and transparent practices relating to the extension of credit, and requires card issuers to modify a host of business practices that undoubtedly affected credit card companies’ cash flows. In order to comply with this legislation, card issuers have introduced strategies that diminish balance sheet risk by gravitating toward dependable credit and jettisoning cardholders that historically had been financial institutions’ bread and butter, and severely curtailing future offers of credit to borderline consumers.

The economic crisis confirmed the notion that the future success of Accounts Receivables Management  companies is fundamentally dependent on a broader U.S. economic recovery. That recovery may be a long time coming – the need to increase the debt ceiling, the potential U.S. credit-rating downgrade and a 9.2% unemployment rate don’t inspire much confidence. That said, informed conclusions can be drawn about the future foundation for ARM industry growth. These factors include:

Material employment gains: The single greatest drag on collection industry recovery performance is assignable to debtors maintaining gainful employment. Real wage gains, however unlikely, would further bolster the impact of reduced unemployment.

Resurgence of the U.S. housing market: Because consumers’ largest assets are typically their houses, keeping existing mortgage-holders in their homes, reforming lending guidelines for first time entrants to the market, and stabilizing prices of existing home inventories to stimulate new real estate investments is vital to rebuilding the equity in consumers’ homes and increasing revenue in related industries such as manufacturing and construction.

Renewed consumer confidence and spending: Consumer spending drives approximately two thirds of GDP and thus serves a crucial role as an engine of economic revitalization.

Increased access to credit: Consumers must be able to borrow and spend on the basis of open access to credit. Similarly, players in the ARM industry must also utilize new sources of open capital to fund not only operating expenses, but product and service line development, capital expenditures, and M&A activity in order to effectively grow their businesses.

Calculated ARM industry responses to legislative and regulatory reforms: The debt collection industry can do little to stem the current tide of pro-consumer reforms. Its true capacity to affect change will be determined by the degree to which responses to new regulations are carefully considered and level-headed.

Flexibility in the face of adversity: Simply put, complacency is the death knell of receivables management collection agencies in the wake of the current economy. In order to thrive, collection agencies must put aside antiquated notions of debtors as adversaries and re-imagine both creditors and debtors as clients. They must do away with one-track service offerings, filial allegiance to unprofitable clients, outmoded technology platforms, vulnerable security protocols, and obsolete accounting methodologies.

Are there other factors that you think will affect the growth of the ARM industry? What is your business doing to continue growing and evolving during this time of economic recovery?

This economic environment continues to present very real challenges for accounts receivables management (ARM) companies and departments. In order to meet these challenges the ARM industry needs to act decisively to mitigate the risks to their future success.

Accomplishing this will require ARM executives to engage in a significant ideological shift: while creditors across various industries will continue to be defined as ARM clients, the industry would be well served to redefine its customers as the debtors from whom they collect.

Knowing those debtors—how they think and behave, the daily pressures they confront, and the ever expanding resources (both to meet and avoid their financial obligations) at their disposal—is of paramount importance.

The first step in knowing your debtor is to understand and appreciate the hierarchy of payments theory which suggests that consumers under financial duress will elect to pay certain debts before others, allowing certain obligations to default more frequently. Although the premise is simple, quantifying when and how debtors make these choices is challenging.

Conventional wisdom suggests that many American consumers have traditionally obeyed a pattern of “mortgage-then-auto then-credit cards” hierarchy. The theory assumes that protecting the family home against foreclosure is the highest priority for consumers. But the U.S. housing catastrophe may have irrevocably changed this dynamic. According to RealtyTrac®, the leading online marketplace for foreclosure properties, nearly 2.9 million U.S. properties received a foreclosure-related filing in 2010, an increase of nearly 2 percent from 2009 and a 23 percent increase from 2008. As a result, it is possible that consumers drowning in unsustainable mortgage debt are likely to realign their payment behaviors in such a way that a monthly car payment—the literal and metaphoric vehicle that gets them to the job that pays their bills—now assumes the central position in the hierarchy. Other consumers, however, may respond to the difficult economic conditions by assigning a greater level of importance to continued spending, and thus expand credit card payments to shore up the foundation of the pyramid in order to facilitate that aim.

Creditors and their ARM service providers are paid based on a changing but typically finite household wallet share. It should come as no surprise that under economic duress, monthly household budgets are not growing in any material way, but they are continually changing and vary widely based on an individual debtor’s employment and housing status, geographic location, and numerous other demographic characteristics. In future posts we will explore how the ARM industry can secure future profitability and sustainability by more precisely understanding debtors and how they are coping with the current economic environment.