The get-tough bankruptcy overhaul signed by President Bush last week should be a bonanza for collection agents, given that the law is aimed at coaxing consumers to pay off their bills rather than just walking away.
But collection agents are unsure how things will turn out. Though the industry supported the law, bill collectors are worried about the cost of tracking accounts from debtors who can't pay and won't file for bankruptcy.
Ron Sargis, a Sacramento attorney who represents collection agents, said that an outgrowth of the law could be a rash of small-scale accounts that are more trouble than they're worth.
"If we can get 15 cents to 20 cents on the dollar, then it's worth it," Sargis said. "If we're going to get 4 cents on the dollar, then I'd rather have the debts dismissed in Chapter 7."
The law, pushed heavily by banks and credit card companies, was designed to force wage earners who are capable of repaying at least 25 percent of their debts over five years to file under Chapter 13 of the Bankruptcy Code and establish a payment plan. Many of these people would have filed under Chapter 7 of the old code and erased all their debts.
Nationwide, roughly 1.3 million Americans filed for Chapter 7 in 2003. The American Bankruptcy Institute estimates that anywhere from 30,000 to 210,000 potential bankruptcy filers will be disqualified under the new law.
"If creditors are going to get paid more, then collections agencies are going to receive more," said Brian Davidoff, a lawyer at Rutter Hobbs & Davidoff Inc. in Century City. "There's no doubt about that, in the long-term."
In the short term, though, bankruptcy filings are likely to skyrocket as debtors rush to file before the proposed law goes into effect. After that, the law will force collection agents to spend more time figuring out who can pay and who can't.
Collection agencies typically work off a commission paid by creditors who hire them after a bill goes unpaid for 90 or 120 days, receiving anywhere from 30 percent to 50 percent of the recovery. But they get nothing if they hassle someone who is too poor to pay or, in the past, who filed for Chapter 7.
"Years ago, when you got a consumer on the phone, all you often talked about was their ability to pay," said Mark Milstein, a third-generation owner of Best Service Co., a Westwood collection agency that specializes in bank and credit card debt. "But now credit is easy to obtain and personal responsibility is so poor we see people with some ability to pay just filing for bankruptcy without trying to work things out."
While collection agents widely consider Chapter 7 overused, it had the ancillary effect under the old law of weeding out accounts that had no chance of being paid back. Now, debtors who aren't worth collection agents' time may avoid filing for bankruptcy at all if they can't file under Chapter 7. This could end up having the unintended effect of useless accounts languishing on collection agencies' books.
"One of the things we all have to look at is that credit cards are real credit, and if lenders are getting to the point of handing out credit cards on thin documentation, then they shouldn't cry too hard when, lo-and-behold, the guy you gave the card to doesn't pay," Sargis said.
Reid Steinfeld, an attorney at Calabasas-based Grant & Weber, which specializes in collections for hospitals and health care providers, said he remains doubtful that the new law will change debtors' behavior as intended.
"Collections agencies are businesses and you have to think that if it doesn't make economic sense, it's not going to make legal sense," he said. "The whole point is to work out problems before they become real problems."
Many collections agents said they are not interested in trying to collect from people who have no money and no ability to pay. They will simply close a file that's not economically feasible to pursue. Already, collections agents file fewer than half of 1 percent of lawsuits against deadbeats.
"Most people are filing bankruptcy because they can't afford to pay their obligations," Steinfeld said. "All the bill does is make it a bit more fair for the creditor, so if you make money, you have to pay and hopefully it will shake out the people that are really dishonest."
Many debtors resolve overdue bills through a compromise with a collections agency. Agencies typically recover between 5 percent and 40 percent of the amount owed, although this figure varies depending on the industry. The field has become highly computerized and specialized within five major areas: banks, bad checks, government, medical, and utilities.
The largest agencies in Southern California are USCB Inc., based in Los Angeles and Fullerton, Collectech Systems Inc., of Calabasas, American Agencies of Torrance, and Grant & Weber. Nationally, the largest players are publicly traded NCO Group Inc., in Horsham, Pa., and Outsourcing Solutions Inc. of St. Louis.
Collections agents play the role of mediator, using the account information from their clients a bank, creditor card company or hospital to contact the consumer and urge them to pay even a small amount on the account. "We try to find a solution that results in payment on as many accounts as possible for as much as possible," Milstein said.
Collections agencies are regulated by the federal Fair Debt Collection Practices Act and by California's Rosenthal Act. (In-house bill collectors are unregulated.)
These laws restrict collections agencies from a number of tactics including threats, using obscene language, making false statements and engaging in unfair behavior. Collections agencies also are limited to phone calls between the hours of 8 a.m. and 9 p.m.
One other provision of the new bankruptcy law: It requires debtors to seek debt counseling before filing bankruptcy. Many collections agencies fear creditors will be victimized by unregulated debt counseling agencies.
"This just adds another cost and expense to someone who is already burdened and stressed out over their finances," Sargis said.
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