I’ve been involved in the debt settlement industry for nearly a decade, and I’m still amazed by some of the crazy stuff that debt collectors tell people. Sometimes it seems like they have nothing better to do than sit around and think up strange or insulting things to tell debtors in order to intimidate them into making a payment, whether or not they have the money.
Incredibly, one of my clients was recently told to “go sell her blood” in order to raise money to make a payment! Another client, who makes her living as a commercial artist, was told, “Maybe you’re just a lousy artist and that’s why you don’t make enough money to pay your bills.” Both of these clients are honest hard-working people struggling to make ends meet like millions of other consumers. They were not in this situation by choice, and they would happily have stayed current on their debts if they hadn’t been hit with unexpected financial distress.
My intention is to blog about some of the pressure tactics that collectors use, in the hopes that people on the receiving end will read these posts and take heart. In this first post about collection tactics, I’ll focus on one of the common myths that is repeated daily on countless collection calls. I’m referring to the concept of “bankruptcy insurance.”
Let’s say you’re trying to negotiate a settlement on an account with a collection agency. You tell the collection rep that you are earnestly trying to avoid a bankruptcy, but you’re simply not in a financial position to make payments, and that you hope to eventually gather enough funds to settle the account. In a rude and condescending tone, the collector says, “Our client doesn’t care if you file bankruptcy. In fact, they would prefer it, so you might as well go ahead. That way they can file a claim against their bankruptcy insurance.”
What the… ? Is there such a thing as bankruptcy insurance? What just happened here?
What happened is that the collector used one of the oldest collection tricks in the book: the psychological removal of any leverage the debtor thinks they might have. You see, most people correctly assume that the threat of bankruptcy is a serious concern to a creditor. But the debt collector doesn’t want you to think that way. They want to mentally remove any bargaining power you think you have. They will try to confuse you and create fear, doubt, and uncertainty. Since most people who are up against aggressive debt collectors eventually mention the B-word, some genius thought up the idea of “bankruptcy insurance” as a way of deflecting and downplaying the threat of bankruptcy.
Folks, there is NO SUCH THING as “bankruptcy insurance.” There are no insurance policies that protect a credit card bank or unsecured lender against losses due to default, simply because there are no insurance companies foolish enough to issue such a policy. Why? Because such losses are predictable to the extent that the cost of the premium would equal or exceed the amount of the losses. The major credit card banks know with a high degree of accuracy what losses they will typically incur on an annual basis. It’s all programmed in as a cost of doing business. Sometimes the results come in slightly above or below expectations. But there is not enough variation for any type of insurance policy to make sense at all.
For insurance to work, there must be a large enough pool to spread out the risk, as with life insurance. When an insurance company issues a life insurance policy, they are betting that you will not die during the period the policy is in force, so they will get to keep all the premium they collect from you. The money they pay out in death claims is exceeded by the premium they collect from all the people who don’t die within the policy period. This could not possibly work in the context of creditor losses because it would be a losing bet for the insurance company unless they charged more for the premium that the expected losses. So if you are a creditor, good luck finding anything that resembles “bankruptcy insurance.”
Anyway, if you’re trying to haggle with a collector and the subject of “bankruptcy insurance” comes up, just laugh and say, “Oh, come on, you’re not really going to try that old trick on me, are you?”