The debt collection industry is good for the U.S. economy! I’ll bet you didn’t know that, right? This conclusion was reported recently in a study commissioned by ACA International, the trade organization for the collection industry. Surprisingly, there has been very little media attention about the report.

Given the mountain of bad publicity that the collection industry has received in recent months, it’s interesting that this report didn’t receive more notice.

The survey, conducted by Pricewaterhouse Coopers LLC, reports that in 2005 the collection industry returned $39.3 billion to creditors. To drive the point home, it states that “…the $39.3 billion in debt returned to creditors on a commission basis is equivalent to an average savings of $351 per American household that might have otherwise been spent had businesses been forced to raise prices to cover the unrecovered debt.” Further, this translates to “…approximately 19 bags of groceries, 129 days of electricity or 155 gallons of gasoline.” A footnote informs us that a typical bag of groceries costs $18.79, the average monthly electricity bill is $81.42, and the average price of regular gasoline was $2.27 in 2005. (I’d like to know where they are shopping for groceries!)

The study cites numerous figures in support of the overarching claim that debt collection is a wonderful thing for our economy. Moreover, it’s a growth industry with nearly double the jobs (150,000) in 2005 versus 1990 (70,000).

Skeptical? Me too. I’ve little doubt that the figures cited in the survey are reasonably accurate based on the scientific sampling of collection companies that was conducted. The $39 billion figure is probably a pretty good measure of the size of the industry. But is it really so straightforward a relationship that it translates to $351 for every household? Not likely.

There are some serious flaws in the logic used to arrive at this conclusion. For starters, who’s to say that the $351 ever made it back to the American consumer? There’s simply no way to analyze this. We don’t know whether that $39 billion in revenue returned to American businesses was used to hold off on price increases, as the report claims with no supporting evidence whatsoever. How do we know the returned money simply didn’t go into corporate coffers, mergers and acquisitions, or executive compensation plans? Taking the figure of $39 billion and simply dividing by the number of American households is, quite frankly, an absurd thing to do, as it assumes even distribution across our society.

But that’s not even my main objection to the conclusion of this report. What about the offsetting costs in lost productivity due to collection activities? As anyone who’s been on the receiving end of a collection phone call knows, there’s no way to concentrate on getting anything useful done while a collector is haranguing you. This important factor is simply ignored in the report, as though there were no costs on the other side of the equation.

So let’s do some fuzzy math of our own here to provide a more balanced treatment of this issue. If there are 150,000 collectors working in the industry, that translates to 300 million person-hours per year, or 18 billion work-minutes per year. So I think it’s reasonable to say that it took 18 billion collection minutes to recover that $39 billion of debt. That works out to $2.16 per minute, which is why the collection industry is so profitable. But someone was on the other end of the telephone for those 18 billion minutes, presumably not getting any work done. That translates to 300 million hours of lost productivity to the economy.

What’s the value of an hour of labor? I’m sure there’s a statistic on this someplace, but I’ll pull a number out of the air and say $50 value per hour. Remember, it’s not the average wage that we’re comparing here, but the revenue generated by that wage. It’s probably higher than that, but if the average annual income is around $40,000, that’s $20 per hour. An employer had better be making 2-3 times in revenue what’s being paid out in wages or they won’t be around for very long. So this works out to at least $15 billion in lost productivity due to collection activity. It’s interesting when you look at both sides of the story, isn’t it?

Another flaw in the report’s conclusion is that the $39.3 billion was “returned” to the economy. So, where was that money in the meanwhile — in the twilight zone? Presumably, that money was sitting in banks across the country, being lent out by the bankers in loans. Or it was money that would have been spent on other things anyway, like groceries, mortgage payments, car repairs, home improvements, etc. By taking the raw number of dollars collected and not looking at the other side, the report gives the false impression that the $39 billion was sitting in offshore bank accounts, totally outside the U.S. economy. That’s simply not the case, and that money was already doing other useful work in our economy.

While I do think that creditors have a right to collect what’s owed them, and the collection industry serves that purpose with ruthless efficiency, I seriously doubt that this report paints an accurate picture of that industry’s value to the U.S. economy as a whole. Rather, it tells only one side of the story, as though American consumers had $39 billion tucked away in coffee cans until those wonderful debt collectors came along and “returned” it to the rest of us. I guess this is just another example of how statistics can be used to say just about anything one wants them to say.

The Buffalo News has run two articles highly critical of the local debt collection industry. The first article, “Merchants of Debt,”focuses on the large collection industry presence in the area. Many of the complaints made by consumers about collectors are against firms located in Buffalo, which is a major hub of the collection industry.

The article quotes Federal Trade Commission official Peggy L. Twohig as saying, “The whole nature of the industry is there are incentives to be aggressive.” Talk about understatement! The $1,000 federal penalty for violation of the Fair Debt Collection Practices Act has not changed in decades. Many agencies view the occasional fine as a cost of doing business. Meanwhile, the amount of debt available for such agencies to work has grown enormously in recent years.

Collection industry spokespersons routinely claim that many of the complaints are groundless and that real abuses only happen in a small percentage of the cases. Yet ex-collectors say that the pressure to produce is always top priority, while managers look the other way on compliance issues.

Some of the worst offenses seem to be by collection law firms. Lenahan Law Offices went bankrupt last December under the weight of regulatory fines. And Giove Law Office was banned from collecting debt in Idaho for threatening debtors with criminal charges. But non-attorney agencies have also come under fire. Top industry agency NCO Financial paid $300,000 in a settlement with Pennsylvania’s Attorney General to resolve more than 800 complaints against the firm.

The second article, “Wide-Open Market for Debts Feeds Abusive Tactics,” focuses more on the industry practice of purchasing delinquent debts for pennies on the dollar and then dunning debtors to make a profit. In the past, debt purchasing was not as common as it has become in recent years. Banks would continue to retain ownership of the debt and hire third-party collection agencies on a commission basis. Since the banks did not want their own reputations damaged by abusive collection tactics, there was at least some oversight to maintain compliance. Now, however, it’s more common for the bank to sell off bad debts and turn a blind eye to collection tactics. The courts have ruled in several cases that banks are not liable for collection activity that occurs after the debt has been sold. So it’s open season for debt purchasers.

I personally do not object to the concept of debt purchasing or even third-party debt collection. I happen to think that the debt collection industry provides a necessary function in our economy. I do feel, however, that regulations need to be enforced to a much greater degree than they are at present. In addition, tighter rules need to be established for the collection of purchased debt. That end of the industry is the main source of the increase in consumer complaints. More than 40% of the complaints received by the FTC about debt collectors allege that consumers were being harassed over debts they did not owe. That’s not surprising, given that purchased debt is often several years old. Junk debt comes with very little documentation. Often, the purchaser takes a shotgun approach and duns everyone in the nearby area with the same name that’s on the account. Stories are multiplying about people being hassled and threatened over debts that aren’t theirs in the first place.

It’s clearly time for Congress to take a fresh look the Fair Debt Collection Practices Act, with an eye to increasing penalties for violations, and the addition of rules that pertain to debt purchasing.

A new national survey was released today showing that Americans are more worried about not being able to pay their bills than they are about terrorist attacks. The survey was co-sponsored by the Center for American Progress, a non-partisan think tank. “Public Recognizes Debt as a Fast Growing Problem in U.S.” discusses the survey in more depth and contains a link to the actual publication in PDF format.

Several interesting facts jump out immediately from the published report:

1. Nearly half (47%) of those surveyed reported household debt as a serious problem, and more than 80% reported debt as a somewhat serious problem for their household.

2. Nearly everyone surveyed (86%) believes that the number of Americans having trouble with household debt has increased in the past 5 years.

3. The public is more worried about falling into debt, particularly from medical bills, than about being the victim of a terrorist attack or a natural disaster, with 48% of respondents stating their top worry as “not having enough money to pay bills.”

4. Credit card debt is the leading type of debt among senior citizens, to a greater extent than for any other generational subgroup.

5. Only 51% are able to pay off their entire credit card bill every month.

This survey publication comes on the heels of an announcement last week by the Federal Reserve that revolving debt had climbed to $813 billion in May. The increase in May alone was $6.7 billion, up 10% from the prior month’s increase. (Note: Revolving debt is primarily credit card debt.)

Clearly, the debt burden on the American consumer is mounting relentlessly, month after month.

MP Dunleavy, columnist for MSN Money, just published an article that ZipDebt readers may find of interest. The article is titled, “Losing at Balance-Transfer Roulette,” and it tells the story of two 25-year olds struggling with credit card debt. Both of the women whose stories are told in the article played the balance- [Read more…] about ZipDebt Quoted in MSN Money Article

When Congress passed the bankruptcy reform bill last year, they included Section 1229, which asked the Federal Reserve Board to conduct a study to determine whether the “indiscriminate” extension of credit to consumers had contributed to the increase in bankruptcy filings.

The report is a treasure trove of fascinating little tidbits of information. Here are a few examples:

1. In 2004, 71% of American families held general-purpose credit card accounts, up from 16% in 1970.

2. 56% of families carry a balance on bank-type credit cards, and 24% hardly ever pay balances in full.

3. As of 2004, outstanding debt on credit cards was $645 billion.

4. An average of 8.9% of families were late at least 60 days on a debt in 2004.

5. Profitability of credit card banks is nearly double that of commercial banks.

6. More than 5.2 billion credit card solicitations were mailed in 2004, up from 2.7 billion in 1995.

7. The response rate on credit card solicitations has dropped from 1.4% in 1995 to 0.4% in 2004.

There’s a lot more in the report, but the above gives the flavor of the type of data published by the Fed about the credit card industry.

Predictably, the report produced by the Fed concludes that the credit card banking industry is not to blame for the increase in bankruptcy filings. Specifically, “…this review finds that as a matter of industry practice, market discipline, and banking agency supervision and enforcement, credit card issuers do not solicit customers or extend credit to them indiscriminately or without assessing their ability to repay debt.”

Did we expect anything different from the Federal Reserve? Not really. Frankly, the study was simply not deep enough to penetrate the real issues at hand. If the banks are so good at determining repayment ability, then why do I keep talking to people who have far more credit than annual income? Why do the credit card banks make more than 30% of their profit from the delinquent status of their customers (late fees or penalties)? Since the only income data they gather is what’s on the application, how on earth do the banks determine ability to repay in the first place?

To be sure, the report does state that “…certain specific industry practices of late have been deemed by regulators to potentially extend borrowers’ repayment periods beyond reasonable time frames and have been the subject of extensive supervisory attention and guidance.”

Translation: It takes 20 or 30 years (if not longer) to pay off balances via minimum payments, which results in a situation most of us would simply call “highway robbery.” So the Office of the Comptroller of Currency has forced the banks to increase their minimum payment levels and bring down the repayment period.

Where the Fed report gets really interesting though is the conclusions regarding the bankruptcy trend. After citing several economic studies, some of which contradict each other, the report states that “…the longer-run trend in bankruptcy filings is historically related to a number of factors, including an increase in revolving consumer credit use and, perhaps, a decline in the stigma associated with bankruptcy. It also appears that the decision to declare bankruptcy is typically triggered by unforseen adverse events such as job losses or uninsured illnesses.”

Oh, so THAT’s why all those people file bankruptcy every year? I never knew it was because they have more debt, they lose their jobs, or they get injured. How could we have known?

Seriously though, the Federal Reserve report clearly shows a correlation between consumer bankruptcy filings and the inflation-adjusted amount of revolving credit per household. At the same time, it concludes that the credit card banks have nothing to do with this. So if I have this correctly, the Fed is saying that increasing consumer debt has contributed to the increase in BK filings, but the banks do a good job of managing credit risk so the increase in debt which led to the increase in bankruptcies is not their fault. Am I missing something here?

ZipDebt is an idea that I had after leaving my position as an executive with a large debt settlement operation. The idea is simple enough: Why can’t people do this themselves for a fraction of the cost?

The name is itself is nothing special. I wanted an Internet domain name that would be short, easy to remember, and contain the word “debt.” Unfortunately, just about every possible permutation was already taken – again, because there are a zillion debt websites. But “ZipDebt” gets the point across. “No Debt.” That’s the goal.

Anyway, the idea behind the name is to provide the American consumer with a NEW debt resolution option: The do-it-yourself-with-coaching program — affordable, effective, and different from what anyone else in the debt industry is doing or offering.

Most of the existing solutions don’t work. Borrowing against equity is often a trap. Credit counseling has a documented failure rate of 75%. Chapter 7 Bankruptcy is more difficult to qualify for, and Chapter 13 Bankruptcy is a much tougher program after the new law went into effect in October 2005. Debt settlement companies are up against increasing regulatory pressure and creditor backlash in a simultaneous squeeze play against the industry. Plus the fee structure of the industry is simply not in the best interests of the consumer. (See my earlier post on this subject.) Yet the mathematics of debt negotiation and settlement (minus the fees) makes a lot of sense for a wide variety of financial hardship cases.

So I recorded my Debt Elimination Success Seminar and established this website to offer it for sale, initially selling only the seminar without any coaching. After a while, I started getting questions from customers. Although I made the audio seminar as comprehensive as possible, every situation is different and collectors are pretty good at scaring people. So I started getting a lot of emails for follow-up advice. Hence the idea of coaching folks by email, which has worked out very well. You can see some of the more recent results in later posts on this blog.

Lately, I’ve shifted the emphasis a bit, from an audio-seminar that includes some coaching to a coaching program that includes a training seminar. More and more clients have told me that the seminar is great, and it really helps them to understand the whole negotiation and settlement process, but it’s the coaching they find invaluable. When you consider that the cost of the coaching program is well under 10% of what most settlement companies charge, it certainly makes sense to negotiate on your own (with help from yours truly). It means you can get out of debt much faster, since all your resources are going toward getting rid of debt and not toward fees. I should add that I really have nothing against the settlement companies. It’s just that it makes more financial sense for consumers to do this on their own.

If you have questions or concerns about this approach, then please feel free to request a free 20-minute phone consultation with me.