• Granting credit carries with it an unavoidable element of risk. You will have losses regardless of how closely you screen applicants.
• While no one credit-collection program can serve all needs, there are fundamental procedures that you can follow, regardless of the goods and services involved.

.....This covers various topics related to the control of credit losses by creditors who sell to consumers.

....You do not have to accept excessive losses as an inherent part of doing business. When the charge-off rate exceeds five percent, it is not only possible but necessary to find ways to improve your controls over bad debt losses.
 

• a clear understanding of terms when a credit transaction is initiated,
• a systematic and diligent follow-up of every account, and
• a periodic age analysis of every outstanding account.
   

....The first of these requirements, establishing a clear understanding of payment terms, is the one most neglected. This results in problems that are difficult and costly to overcome. When payment terms are not fully understood in the beginning, you must correct this weakness quickly and systematically so that it is possible to control bad debts.

....Communication techniques are oral (person to person or by phone) and written. Oral communication must be controlled by the creditor. Written communication is most effective when brief and aimed at a single purpose. The third requirement, age analysis, can be accomplished by using a simple, inexpensive form listing the name, amount owed and age of account (30 days, 60 days, 90 days, over 90 days).

....Such customers as these are not the main concern of this booklet. They are mentioned to emphasize a fundamental, effective collection practice-keep the account good. This is possible only if you give it proper and constant attention.

....You may find that using the telephone and a personal interview may be the best ways to accomplish this job. Usually friendliness and firmness can be combined best through oral communication. However, if you feel that you can do better through a written appeal, "reselling" letters have been used with reasonably good results.

....Persuasion will be based on appeals such as fairness, pride and desire for a good credit reputation. Attempt to set up a definite and clearly understood payment program. This should be done, regardless of the circumstances of individual cases. Long-term as well as short-term extensions must be pegged to definite dates. Indefinite promises, protestations of honest purpose and nebulous payment arrangements are usually worthless.
 

• Demand settlement in full within a specified time. The term "settlement in full" is preferred to "payment in full" since it is more flexible and gives both you and the debtor greater opportunity to dispose of the debt satisfactorily. Whatever term is used, it should be brief and concise. A common error at this stage of collection is to review the whole history of delinquency. Avoid this. It only causes additional delaying arguments. You should emphasize that you want your money on or before a certain date. State this briefly and only once. Repetition at this point is deadly for you. If you follow this procedure closely, usually there will be good results. Unsuccessful cases will require final action.
• Take final action. For some debtors, the older a debt becomes, the more reasons there are for not paying it. The value of efforts at this stage of "final action" is questionable. Often your time is not very productive, and only occasionally are there returns. But "final demand"-supported by positive reasons for payment-sometimes brings good results.
   

....At this stage of collection, you should remember your past attempts at collection when constructive appeals failed. Nothing remains to be done but to state that you will begin decisive action, such as placing the account elsewhere for collection, if the debt is not paid by a certain date. Fully intend to carry out any action that you mention to the debtor.

....This type of collection action should be planned and used carefully. Much of it that is used has little value. Some of it could even be illegal. Be sure to mention only those actions that you can legally take and that you actually intend to take. As for the method of notification of your next action, a notice of intent that is sent by certified mail will do the best job at the least cost.
 

....Your action at this point in the credit-collection procedure is most important. What you do determines the difference between recovery or loss. When you identify a potential bad debt, you should act promptly and decisively. Normally, the more time debtors get, the less they pay. Stories about accounts carried indefinitely, and eventually collected, usually originate with creditors who do a limited business or have the highest credit losses or the lowest bad debt recovery.
 

....Look to a collector for help when you see any of the following symptoms: 

1. The new customer does not respond to the first reselling notices. The reason may be that he will not or cannot pay. Potential losses can be kept to a minimum by prompt referral to a collection agency.
2. Payment terms fail for no valid reason. In these cases, irresponsible debtors pay when and if they decide to. This group is responsible for 25 percent to 50 percent of the cost of collections. Cost and potential losses are reduced by quick action.
3. The debtor makes repetitious, unfounded complaints. Such debtors are better handled by those experienced in collection techniques.
4. The debtor denies responsibility. Without immediate professional help, these can be written off as total losses.
5. Delinquency coexists with serious marital difficulties. These also require professional collection help, with the added urgency of obtaining payment before the disappearance of one or both of the responsible parties.
6. Repeated delinquencies occur along with frequent changes of address and/or jobs. It is from this group that 90 percent of all "skips" originate. A skip is a debtor who has moved without informing his creditors or leaving a forwarding address. The wise creditor seeks help from a professional collector when the location of this type of debtor is still known, before he becomes a skip.
7. When obvious financial irresponsibility is found. In such cases, little hope exists for voluntary payments.
8. The debtor is a skip. The farther away he gets and the longer the time since his last location was known, the harder it will be to find and collect from him.
9. There is an unauthorized transfer or disposal of goods delivered in a conditional sales contract. Only prompt professional assistance can make any recovery.
10. The delinquent debtor fails to keep in contact. Such a debtor is in one of the above groups. Using a professional collector is your best hope to obtain any payment on the debt.

....There are other situations that need prompt attention in specialized fields. Department store credit managers will be concerned about unauthorized charges. Physicians and hospital administrators will have patients who cannot be made to understand that most insurance has a limit and that collection from an insurance company is a patient's responsibility. Creditors doing business in a large trade area may find debtors relying on distance to avoid payment.

....To maintain close control over bad debts, review these 10 categories based on your own experience. This should convince you that you will need help collecting such accounts.

• habitually slow in paying
• financially immature
• irresponsible about employment and usually irresponsible about family obligations
• unavoidably involved in debt
• incapable of handling his or her own problems
• skips, runs away from debts
• deliberately buys with no intention to pay (credit criminal)
• tries to reduce debt through unfair complaints
   

....Absent from this list are those who lose their jobs through no fault of their own and those who have unexpected financial reverses. In most cases, such people will voluntarily communicate with you and arrange for future settlement. To these people, you owe a moral obligation of leniency. They communicate with you. The potential delinquent debtor does not. It is the non-communicative, recalcitrant and argumentative debtor from whom a good portion of bad debt can be recovered by the selection and timely use of a qualified collection agency.

1. Post in your credit office the 10 situations that require prompt collection agency attention listed in Identifying Potential Bad Debts.
2. List collection agency accounts on special listing forms. More and better information about the accounts means more and better collections. In all cases, the minimum information should be the correct name, address and telephone number of the debtor; name of spouse, if known; whether mail has been returned; debtor's occupation, if known (otherwise, the last known occupation); names of relatives, friends and trade references (important in the order stated); if there is a dispute, a summary of the facts; and date of last transaction (whether it is a charge, cash credit or adjustment).
3. Having placed the account for collection, rely on the experience, diligence and judgment of your collection service for the best and quickest results. Promptly refer any developments on these assigned accounts to the collector.
4. Since professional collectors' services are personal in nature-with the debtor as well as with you-see that your collector is fully acquainted with the nature of the goods or services involved. This helps the collector handle intelligently the many complex situations that normally arise during collection activity. In addition, the collection service should be given a fair understanding of your accounting system so that the collectors can maintain mutually acceptable records and keep books in balance with yours. The better the collector knows your individual requirements and specialized field, the more fully he can serve you. The relationship can be mutually profitable.

    

• is a member of a national trade association. Membership is an indication of professional integrity.
• has a good reputation in the community with merchants, members of the medical profession and other credit grantors.
• has complied with the state's statutory requirements as to bond or license or both.
• charges fees that are clearly stated and seldom subject to misinterpretation. Rates and fees are usually on a contingency basis-no collection, no charge. If the collection agency requests a written contract, the agency will welcome your having it reviewed by an attorney.
• is able to place accounts with other collectors in other areas of the country. This is known as "forwarding."
• is able to account to the creditor on a specified date each month for all money collected.
• is prepared to give the best possible effort. But the agency cannot guarantee results on any specific date, as this would be misleading.
• is equipped to work and follow all accounts diligently.
• has complete and modern facilities for tracing debtors who skip.
• will promptly notify you when it discovers a debtor who is a hardship case and will recommend the proper procedure to follow.
• exhausts all reasonable means of securing voluntary payment before recommending legal action.
• has the good will and cooperation of local lawyers, the Better Business Bureau and the Chamber of Commerce.
   

....Along with serving creditors, professional collectors can assist credit users, including those considered to be delinquent debtors. They can help people solve problems with paying bills and maintain or work toward good credit reputations. Former bad credit risks can be reestablished in the credit granting community. Actually, all credit grantors suffer from debt losses. Creditors who keep these losses to a minimum can pass the savings on to all customers through reducing operating costs, another advantage to credit users. To get the maximum benefit for all from the services of professional collectors, those who extend credit should select the best qualified agency available.

....Most ACA agencies work on a contingency fee basis. A few offer other types of compensation plans. Many do not require a written agreement with the creditor, but rely on a relationship based on mutual trust and confidence. Through membership in ACA, members are offered an extensive educational program of seminars on the most effective collection techniques and a variety of other topics to make their own operations efficient. Other member services include insurance programs, a monthly magazine, research survey results, public relations services and educational materials including printed materials, computer disks, audiocassettes and videotapes. ACA also produces material for consumers and schools, including pamphlets on solving payment problems and career information. ACA members often speak before classes and organizations, covering many areas of the credit and collection business.

• Workshops on credit and collection topics at national and regional conventions of credit grantors.
• Booklets, such as this one and another for credit grantors in medical and related fields, which cover various aspects of credit loss control.
• Cred-Alert, a monthly bulletin that informs creditors of changing state and national laws related to credit and collections.

   

• Maintain a high standard of business principles. Your conduct should reflect the integrity of all your fellow collectors.
• Provide a complete and efficient collection service in the area your agency serves.
• Always protect the interests of your clients and give prompt attention to all matters received.
• Obey all instructions given by the client in the handling of a claim or promptly give reasons for not doing so.
• Show due consideration for the misfortune of debtors and deal with them according to the merits of their individual cases.
   

• own collection practices are covered by the law under certain conditions.
• should know what their collection services and attorneys may and may not do under the law.
• could be covered under similar legislation in the future and would have to abide by provisions in the law.
• may be liable with respect to the collection practices of third-party debt collectors under Section 5 of the Federal Trade Commission Act and, in some cases, under state law.

   

....The FTC has issued a number of rulings, including consent agreements and cease and desist orders, against creditors in regard to their collection practices. Further detailed information on FTC actions is available in the ACA publication, Credit Grantors & The Fair Debt Collection Practices Act.

....Court decisions that affect collection practices as well as other creditor remedies continue to be handed down. Creditors must be aware of these in order to stay current and to be able to comply with such case law. ACA members are aware of these laws, rulings and court decisions and are able to acquaint you with them.

Source: American Collectors Association, Inc.