Mark explains why collection agencies rarely sue people with unpaid accounts, drawing on how many letters he sent versus lawsuits he filed, and on the playbook large creditors use to maximize recoveries.
Transcript
Millions of letters, very few lawsuits
I worked as a collection agency lawyer for 12 years, between 1994 and 2006, on behalf of four of the largest collection agencies operating in Canada. During this period I was called to the New York State bar, so I was sending out collection letters to the residents of both Canada and the United States. Each year I would send out hundreds of thousands of collection letters, and over this 12-year period I estimate that I sent out approximately 5 million of them. By comparison, I estimate that I sued no more than 500 accounts. That works out to approximately one consumer sued for every 10,000 collection letters that I sent out.
If a person is receiving collection calls from either a creditor or a collection agency, I wouldn't be too worried that they are going to be sued. Collection agencies rarely sue people. Typically what creditors do is cherry pick the files that they're going to sue, and they hire a law firm to sue those files. But for the vast majority of files, after a creditor has tried to collect for six months, they'll just assign the account to a collection agency.
Collection agencies do one thing really well. They send out collection notices, they make phone calls, and they hound people so that they pay their accounts. When we start talking about suing files, that is not a strength of collection agencies. If a creditor wants to sue an unpaid account, they would be much better off hiring a law firm to do it.
Why agencies rarely sue: two stories
I can recall getting to the office one day and learning that I was going to Toronto small claims court that day. This was news to me. I was also told that the trial was going to be in French, and I laughed when I heard that, because I would describe my French as elevator French. What had happened is that one of the salespeople at this particular collection agency had got a contract with a small creditor, and the collection agency had agreed to sue accounts if it couldn't collect them. On this particular account, it had never been sued, and the account had never been given to the legal department of the collection agency.
So the creditor ended up suing the collection agency in small claims court, and for some reason I don't understand, I was asked on the day of the trial to show up and defend the collection agency. I don't think the judge was very impressed with my French, or with the fact that we really didn't have a defense to this particular claim. At the end of the trial we lost, which was pretty embarrassing.
I can recall one national collection agency where I managed the legal department. There were a number of files that we would have been interested in suing, and I remember the collection manager declining to give us permission to sue a number of them. He gave a variety of reasons for refusing. The debtor would be paying court-ordered support. The debtor would have other judgments against him. The debtor would owe money to other creditors. The debtor would be unemployed. The debtor would have a low-paying job, so that if his wages were garnished he would simply quit his job. Or the debtor did not own any real property. There was a host of reasons why a collection agency would decline to sue an individual.
The playbook large creditors use
Let's talk about a big bank, for example. They would literally have hundreds of thousands of unpaid accounts where there had been no payment for, say, 90 days. This is an asset, and they want to squeeze as much revenue out of it as they can while spending as little as possible recovering the money. The last thing they want to do is blow their brains out trying to recover it, so the last thing they want to do is sue every account. This is the playbook that creditors use to maximize their recoveries.
Number one, for the first six months that an account is unpaid, they will use their in-house collection department, their own employees, to try to collect. They may cherry pick a few files and sue the debtor, and these would be files where the debtor not only owns real estate but also owes more than a few thousand dollars. Probably 90 percent of unpaid accounts at six months will be placed with a collection agency on a commission basis, and a creditor is in a win-win position placing accounts that way, because if the collection agency doesn't recover money on a particular account, the creditor does not pay a penny to the collection agency. At some point the creditor may decide it can maximize its revenues by selling the unpaid accounts, and it may sell a large block of them to a debt buyer.
Collecting for a creditor versus buying the debt
With a traditional collection agency, creditors place unpaid accounts with the agency, and the agency attempts to collect them on a commission basis. If it does not recover any money on a particular account, it does not earn a penny in revenue. This gives you some idea as to why collectors are so aggressive with consumers on unpaid accounts: if there's no payment on the account, the collection agency doesn't recover any money.
Now, if we look at collection agencies purchasing debt, sometimes creditors will sell a portfolio of unpaid accounts for a relatively small amount of money. The older the debts, the lower the price. If accounts are two or three years old, they may be sold at a penny on the dollar. If a collection agency purchases the accounts, then it keeps 100 percent of the money it recovers. But it's important to appreciate that anywhere between 90 and 100 percent of a collection agency's revenues come from commissions on money collected on behalf of creditors, and somewhere between zero and 10 percent come from collecting purchased debt.
What I do now
I have a firm called Debt Coach Silverthorn. We have all kinds of articles and YouTube videos that are helpful for people who are struggling with debt. I also provide one-on-one coaching, including coaching for people who are interested in settling a debt with a creditor. In that circumstance the consumer offers to make a one-time lump sum payment to the creditor or its authorized collection agent for significantly less than what the consumer owed, as settlement in full. In many instances it's possible to negotiate settlements for as little as 15 or 25 cents on the dollar.