Developing a good collection formula
All debt is not created equal, and no collector collects on every account placed before them. Collections is a “numbers game” that requires us to play the odds. You can increase your recovery by establishing a collection formula based on the level of debt that you buy. The formula should work to statistically optimize each portfolio’s liquidations.
Some agencies attempt to implement a formula that is suited for one portfolio, but may not be for another. The age of a portfolio should be a good indicator as to the strategy you should initiate.
Say, for example, that you buy a debt portfolio, and place that debt with a collection service. You’ve given them settlement authority down to 60% and you just bought a fresher than fresh portfolio directly from the original lender. You begin receiving remits and there are an extraordinary number of 60% settlements paid in comparison to the files that were paid in full, or settled for much higher. This would be a strong indication to me that your agency is either skimming the files looking for easy money, or they have implemented a rather poor collection formula.
Many collectors believe that the demand for balance in full is required for any level of purchase, but I disagree. However, don’t take that wrong. We should always approach each account in every portfolio with the idea in mind that the balance in full is due, but we also have to be mindful of the fact that we live in a society that promotes settlements. Debtors in advanced stages of delinquency have come to know the system. Don’t let pride get the best of you, and don’t blindly follow an ideal that may potentially lower your overall recovery rates.
Fresh portfolios should rarely settle for less than 80%. There should be a strong demand for PIF, but there should also be a willingness to work with those who can’t meet this demand. A collection formula sets guidelines for doing so, and it gives a collector more credibility in their talk-offs.
Older portfolios require us to employ a collection formula where the guidelines may be a bit more flexible. Our demand for PIF may not be as stringent. Settlements may need to be more enticing to the debtor.
Collectors who fail to know and implement a good collection formula in the negotiation phase of their talk-off often gives off an appearance that what the debtor pays is being pulled completely out of left field. This often enables the debtor to gain control of the situation and dictate the outcome of the negotiations.
So what are some good collection formulas? I could give you our formulas, but the real answer is a question, and that question is “What do YOU want from each portfolio, and in what increment. Below is an example of a collection formula for a Fresh Portfolio and a very old portfolio. The development of the levels in-between would be for you to decide.
Fresh Portfolios / Placements
l Balance in Full
l Balance over two payments
l Balance over three payments
l Settlement in Full
l Settlement over two payments
l Large Down payment with monthly payments with post-dated checks
l Monthly payments with post-dated checks
Older Portfolios / Placements
l Offer 3 options
l A very generous settlement offer
l A not-so-generous settlement offer, but allow payments of the settlement
l PPA with down payment and interest stopped
One final thought about postdated checks. Regardless of collection formula that you implement, postdated checks are crucial to your survival, unless, of course, you buy only in states that do not allow collection agencies to demand postdated checks. If you’ve been a debt collector for any period of time whatsoever, then you know that postdated checks are an effective tool in developing consistency in your recovery numbers, as well as your commission checks. Likewise, postdates play a huge role in effectively achieving stability in debt purchasing. In essence, if you are not good at demanding and securing postdated checks, then you’re going to experience problems in this industry.
If you want some help developing a collection formula for your model, feel free to call us, or go to the forums section of our website and post a question about it.
Rick Shell September 2007