InsideARM Debt Settlement Survey and White Paper


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InsideARM Debt Settlement Survey and White Paper

  1. 1. InsideARM Debt Settlement SurveyHow Creditors and Collectors Utilize theDebt Settlement Industry to Increase CollectionsOctober 2011Brought to you by with reporting findings sponsored by
  2. 2. Comments and Observations (now legislated in a manner designed to strictly mitigate future offenses) has taken a back seat toHistorically, the debt settlement industry has en- liquidation performance and concerns around datajoyed a less than stellar reputation in the eyes of security, privacy, compliance, and the FDCPA. Themost ARM professionals. Many companies were top three reasons provided for not working withperceived as preying on consumers by charging the debt settlement industry related to these issueslarge upfront fees and delivering little or no results while concerns around reputation came in fourth,for the consumer. with only 13% of participants stating reputation as a concern.As is generally the case, the bad actors are the onesthat cast the brightest light over the entire industry; One of the most telling pieces of data to comethe ARM industry is certainly no stranger to this phe- out of the survey centered on a proposed solutionnomenon. It was for this reason we designed this to many of the top concerns noted by the surveysurvey to better understand exactly how the ARM participants. When respondents were asked if theyindustry views the debt settlement industry today, would reconsider their decision to work with debtand more importantly, what role the debt settlement settlement companies if provided a secure, compli-industry can play in increasing liquidations for credi- ant, aggregated data repository of debt settlementtors and collectors across the accounts receivable accounts, nearly half said they would change theirmanagement lifecycle. decision to work with the industry, further demon- strating that security, compliance, and scalabilityWith 649 ARM professionals responding to this in leveraging the debt settlement industry all weresurvey, one thing that was immediately apparent is more important than the perceived reputation ofthat debt settlement is on the radar of ARM profes- the industry as a whole.sionals. With roughly half of the survey participantsindicating that they currently work with the debt wanted to further discover notsettlement industry today, we are seeing the begin- only which companies or segments of our industryning of a clear trend developing towards acceptance most utilize the debt settlement industry, but howof this channel and the adoption of its use to in- ARM firms are utilizing this new channel to increasecrease liquidations. liquidations. When asked if the participant’s firm had deployed a focused strategy to utilize debtAgencies are clearly leading the way in the para- settlement companies, 48% of ARM firms indicateddigm. Collection agencies outnumbered debt they had deployed a focused strategy around debtbuyers 3:1 and legal recovery firms 4:1 in working settlement companies. Furthermore, 44% of thesewith the debt settlement industry. Understandably firms indicated that they had implemented a dedi-so, creditors still rank among the lowest in terms of cated team or workgroup to focus solely on thisfirms utilizing this channel today, but insideARM. segment of the account population. Of the 52% ofcom believes even this group is showing signs of respondents who indicated they worked with theearly adoption around this asset class. debt settlement companies but had NOT deployed a focused strategy, 75% let collectors on the floorIt appears from the results of the survey, as well as work accounts at will in accordance with the exist-the numerous comments provided by respondents, ing settlement authority in place.that the concerns about reputational credibility ofthe industry and the past practices by bad actors© 2011 2
  3. 3. While it was interesting to see such a large percent- conversion rate on a portfolio of debt settlementage of companies that currently work with the debt accounts was in the range of 1-10%. Probably thesettlement industry today, it was apparent that the most telling metric related to performance came inARM industry is not fully exploiting the opportuni- the data surrounding broken payment terms. Theties provided by this new channel. Over half of the highest percentage of respondents at 16% indicatessurvey participants that currently work with the that they saw 0% broken settlements while 28% sawdebt settlement industry work with 10 or fewer debt a break rate of between 1 and 10%, still well lowersettlement companies; and fully 75% of those utiliz- than typical industry averages. This indicates thating this channel work with fewer than 20 companies. while debtors enrolled in debt settlement programsEven with some attrition and consolidation as a may be some of the most difficult individuals to en-result of the new regulations placed on the industry gage in the collections process, once the consumerlast year, there are still hundreds of debt settlement is engaged and actively paying toward a term settle-companies operating in this newly regulated envi- ment, the break rates on these settlements appearronment. Locating and managing hundreds of debt to be much lower than overall industry averages.settlement companies, however, appears to be amajor barrier to firms already resource-constrained As with most practices in the ARM industry today,in a profit-conscious downward business cycle. process automation, scalability and security/compli- ance issues are direct drivers to productivity and ul-When asked about the methodologies and practices timately profitability. In down business cycles whereARM firms utilize to communicate with and share budgets are strained and resources scarce, thesedata with debt settlement companies, over 71% things matter even more. The ARM industry hasrelied solely on the use of inbound and outbound always been keenly focused on developing more pro-telephone calls directly with debt settlement compa- ductive technologies, techniques and practices in annies. Clearly, this practice would be identified as the effort to continually improve productivity and exploitmost inefficient channel to manage large volumes new channels to serve their clients more effectively.of settlements, yet it appears to be the preferred It appears from the results of this survey that theand most widely accepted methodology in practice industry is once again shifting in a manner designedtoday. In the comments provided by numerous to deliver more previously unexplored channels.participants, one of the chief complaints was the Those firms that can recognize the shift earlier oninefficiencies this channel provided and the costly, and quickly move to deploy proven, focused strate-time-consuming manner in which debt settlement gies and leading edge technologies to leverage thiscompanies operate, resulting in wasted time and newfound channel will be in a position to reap thefrustration for collectors. highest returns for their investments.What really matters most to ARM professionals isaccount liquidation performance. In general, the The Survey and Its Resultssurvey results indicate that debt settlement ac-counts perform well; and, based on some metrics, designed its Debt Settlement Surveyquite better than typical mixed-bag consumer card to gain insight into the perception and utilization ofaccounts. Roughly a third of respondents indicated the debt settlement industry by creditors, buyers,that they settle accounts with debt settlement com- collectors, and legal recovery firms. Recent legisla-panies at a rate of 46% and higher. A similar percent- tion may have changed the perception of the indus-age of survey participants indicated that the monthly try, and we wanted to better understand the extent© 2011 3
  4. 4. to which creditors and collectors now utilize this on sponsorship of the survey; they also provided anchannel to manage collections and recoveries. Apple iPad2 as a prize award for participation.The survey, conducted over a two week period in Over the two week period the survey was availableOctober of 2011, generated a good deal of re- on, 649 respondents completed thesponse. We partnered with Persolvo Data Systems survey. The results of the survey and an analysis of the data are provided below.How Would You Classify Your Primary Business Industry? Industry Responses Percent Collection Agency 345 53% Debt Buyer 71 11% Legal Recovery Firm 55 8% Credit Card Issuer 36 6% Other 142 22%What is Your Title in the Organization? Title Responses Percent Supervisor/Manager 138 21% Director 112 17% CEO/CFO/ 110 17% C-level executive EVP/SVP/VP 76 12% Attorney 46 7% Coordinator/Rep/ 31 5% Specialist Analyst 24 4% Consultant 23 3% Administrative 17 3% Other 72 11%© 2011 4
  5. 5. Does Your Company Work With Debt SettlementCompanies to Settle Consumer Debt? Answer Responses Percent Yes 342 53% No 266 41% Not Sure 41 6%Respondents Who Currently Work with Debt Settlement Companies - by Industry Industry Responses Percent Collection Agencies 182 53% Debt Buyers 47 14% Legal Recovery Firms 40 12% Card Issuers 18 5% Other 55 16%The largest group of respondents identified theirprimary business classification as Collection Agency.Collection Agencies made up over half of all respon-dents, or 53%. Collection agencies also made upover half of all companies who currently work withdebt settlement agencies to settle accounts.Debt Buyers were the second largest responders, accounting for 71 companies or 11%. Debt buyers were also14% of all companies who currently work with debt settlement agencies.Conversely, Credit Card Issuers made up the smallest group of respondents to the survey overall, and to thoseanswering YES to working with debt settlement companies. Overall 6% of respondents identified themselvesas a Credit Card Issuer, and only 5% of Credit Card Issuers answered YES to working with debt settlement com-panies to settle debts.This illustrates the clear dichotomy between first-party and third-party businesses: whereas 79% of respon-dents making up collections agencies, debt buyers, and legal recovery firms currently leverage debt settle-© 2011 5
  6. 6. ment companies as a collection channel; first-party Credit Card Issuers made up only 5% of respondentsactively working with debt settlement companies to collect debts through this channel.In conclusion, Collection Agencies, Debt Buyers and Legal Recovery Firms appear to be the early adopters of astrategy shift to leverage the debt settlement Industry as an alternative collections channel, while Credit CardIssuers appear to be willing to surrender these accounts to third-party collectors downstream due to a lack ofwillingness to work directly with the industry at this point.Respondents Who Do Not Currently Work with Debt Settlement CompaniesWhile over 53% of respondents to the survey affirmed they were currently working with debt settlement com-panies to collect consumer debt, 41% of survey participants answered NO to this question. Those companiesthat answered NO identified themselves in the following industry classifications. (Note: Respondents identify-ing themselves as OTHER were primarily service providers to the industry or not directly involved in the collec-tion of consumer debt.) Industry Responses Percent Collection Agency 142 53% Credit Card Issuer 17 7% Legal Recovery Firm 15 6% Debt Buyer 14 5% Other 78 29%© 2011 6
  7. 7. Reasons Provided for not Working with Debt Settlement CompaniesWhen asked to provide the reason or reasons why they did not currently work with debt settlement compa-nies, respondents gave the following justifications. Reason Percent Settlement Percentages too low 16% Legal concerns about dealing with third parties 15% Security/Compliance Concerns 14% Industry Perceived as not reputable 13% Prohibited by agency agreement with creditor 10% Limited resources to dedicate to this channel 8% Break rates too high 5% Too hard to locate and manage multiple debt 5% settlement providers Not enough knowledge of the industry to make 4% this channel effective Other 10%The top three reasons given for not working with the debt settlement industry are related to the economics ofthe settlements derived through this channel, as well as the specific security, compliance, and legal concernsregarding sharing data with debt settlement companies. Given the largest group of companies that answeredNO to working with the industry were collections agencies, who many times work on contingency agreementswith thin margins, this would seem logical.Ironically, reputational credibility of the industry registered only the fourth highest out of nine possible rea-sons provided, indicating that collectors and creditors may now be warming up to the idea of a regulated debtsettlement industry.The last group of reasons provided primarily dealt with a lack of understanding of the industry as a whole, andinability to effectively locate and manage a large group of debt settlement companies or a specific lack of inter-nal resources in order to effectively develop a strategy or manage a strategy in order to leverage this industryas an effective collections channel.© 2011 7
  8. 8. If You Are Not Working with Debt Settlement Companies, What Strategy DoYou Use MOST When You Identify a Consumer in a Debt Settlement Program? Strategy Percent Specialized In-House Collections 42% Contingency Placement 18% Legal Recovery/Legal Network 14% Dunning Notices Only 8% Other 18%It was interesting to note that the companies who saidthey did not work directly with debt settlement compa-nies did in fact have some type of strategy establishedin order to focus on accounts identified as belongingto this channel. Over 42% of survey respondents haddeveloped some type of specialized in-house collections strategy to work debt settlement accounts separately fromtheir other accounts while approximately 18%, issuers or debt buyers presumably, would employ a strategy of con-tingency placement for collection, and only 14% said they would employ a legal recovery strategy.Validating the Reasons for Not Working with Debt Settlement CompaniesThe next question in the survey was designed to confirm any number of reasons given for not working with debtsettlement companies, ranging from data security to legal compliance around FDCPA to a lack of centralization.If Provided a PCI Certified, Centralized Data Repository to Locate Collection AccountsEnrolled with Debt Settlement Companies, Would You Reconsider Your Strategy? Answer Percent Yes 49% No 51%That 49% of respondents said they would recon-sider their decision to settle debts directly with debtsettlement companies seems significant. Clearly, theidea that debt settlement companies are not repu-table is no longer an opinion shared by the majority.To the contrary, the desire to efficiently settle debtsthrough a centralized portal that provides industry-standard data security and compliance was the mainreason over half of all companies currently NOT working with the industry today would reconsider their deci-sion to directly settle debts with debt settlement companies through this type of secure data repository.© 2011 8
  9. 9. How Companies are Currently Working with the Debt SettlementIndustry and What Results are These Companies Recognizing?But what about those companies that responded YES to working with debt settlement companies? wanted to better understand which ARM business entities worked with the industry and what types ofresults companies typically see when collecting debt via this channel.We asked respondents to share information regarding their strategies, settlement percentages, liquidationrates, and break rates on term settlements.Does Your Company Have a Dedicated StrategyFocused Around Debt Settlement Companies? Answer Percent Yes 48% No 52%Does Your Company Have a Dedicated Team orDepartment That Works Debt Settlement Accounts? Answer Percent Yes 44% No 56%If NO, Does Your Company AllowIndividual Collectors to Work DirectlyWith Debt Settlement Companies? Answer Percent Yes 75% No 25%© 2011 9
  10. 10. When asked about a focused strategy related to debt settlement accounts, surprisingly, roughly half of therespondents replied that they had developed a focused strategy around the use of this channel for collections.This demonstrates an acceptance of working with this industry and the adoption of a relatively new channel toimprove collections operations and performance.When asked if companies had deployed special departments or teams as part of their overall debt settlementstrategy, again, roughly half replied that they had developed a strategy that relied on a dedicated team ofindividuals to handle these types of accounts. This demonstrates that while companies are not only looking tothe debt settlement industry as a new source for liquidation improvements, they are recognizing the need todeploy strict policies and strategies in order to maximize the potential recoveries from this new channel and toremain in compliance when dealing with third parties in the collections process.Of the 56% of respondents that answered NO to having a dedicated team to work debt settlement accounts,three-quarters of those same respondents replied that they allowed their collectors to work individually anddirectly with debt settlement companies. Absent a focused and dedicated strategy to work debt settlementaccounts both effectively and to remain in compliance while doing so, collections managers would be advisedto closely monitor the practices of individual collectors when working directly with debt settlement companiesto ensure the organization is communicating and sharing data with these companies in a manner that is consis-tent with current law.Understanding How the ARM Industry is Working with Debt SettlementCompanies and the Performance Metrics Related to Settlements Via this ChannelThe following section of the debt settlement survey focused on the number of individual debt settlement compa-nies that creditors and collectors are typically working with, as well as the channels of communications that areused to share data and settle accounts. Additionally, asked respondents to share their specificperformance results in a number of areas to measure the overall effectiveness of settling these types of accounts.How Many Debt Settlement Companies DoesYour Firm Regularly Work With to Settle Debts? Number of Companies Percent 0 4% 1-10 51% 11-20 20% 21-30 9% 31-50 6% 51-100 4% 101-150 2% 151-200 >1% More than 200 5%© 2011 10
  11. 11. At its peak, the debt settlement industry was made up of more than 2,000 companies. Today, in a post-reg-ulated debt settlement industry, there are still well over 1,000 companies providing debt settlement servicesto consumers. In order to gauge the density to which the ARM industry is effectively engaging this industry toassist in collections, we asked respondents to identify how many companies they regularly work with in orderto settle accounts.What is the Primary Method Used to Communicateand Exchange Data with Debt Settlement Companies? Method Percent Telephone 50% Inbound Communications From Debt 21% Settlement Companies/Negotiators Email Spreadsheets/Account Lists 15% FTP Spreadsheets/Account Lists 11% Other 3%While 53% of all survey participants stated that they worked with debt settlement companies, and of those,48% indicated that they had deployed a dedicated strategy around this asset class, it was interesting to notethat over 71% of the respondents had not deployed a more automated or scalable solution to communicateand share data with debt settlement companies.© 2011 11
  12. 12. Performance Metrics Utilizing Debt Settlement Companies as a Collections ChannelThe next section of the survey focused on the actual results creditors and collectors shared about their settle-ment rates, liquidation rates, and break rates on term settlements. Survey participants were asked to sharethe typical settlement rate they track on debt settlement accounts, the typical monthly conversion rate on aportfolio of debt settlement accounts and the break rates observed on term settlements.What is the Typical Settlement Rate (%) YouTrack Using Debt Settlement Companies? Settlement Rate Percent over 50% 18% 0% 13% 46-50% 13% 10-15% 10% 36-40% 10% 16-20% 8% 31-35% 7% 26-30% 7% 21-25% 6% 41-45% 6%What is the Typical Monthly Conversion Rate YouSee on a Pool of Debt Settlement Accounts? Conversion Rate Percent 1-5% 19% 6-10% 15% 0 15% 11-15% 15% over 30% 13% 16-20% 12% 21-25% 8% 26-30% 3%© 2011 12
  13. 13. What is the Typical Break Rate You See on Term SettlementAgreements on Debt Settlement Accounts? Break Rate Percent 0 16% 6-10% 15% over 30% 14% 1-5% 13% 11-15% 11% 21-25% 11% 16-20% 10% 26-30% would like to thank Persolvo Data Systems for their generous sponsorship of the Debt Settle-ment Survey by providing an Apple iPad 2 as the prize giveaway for participation in this survey. Inside Armwould like to congratulate Darren Price of Security Credit Services LLC, the winner of the iPad Giveaway.© 2011 13
  14. 14. About Kaulkin MediaKaulkin Media is the most credible publisher of specialized news and in- Kaulkin Mediaformation for the accounts receivable management (or “debt collection”) 6010 Executive Blvd.,industry. is the firm’s flagship website, with over 60,000 Suite 802subscribers including collection agencies and law firms, debt buyers, Rockville, MD 20852creditors, suppliers of technology and services to these groups, regula- www.kaulkin.comtors, industry investors, and many other interested parties. www.insideARM.comKaulkin Ginsberg, parent of Kaulkin Media, is the leading strategic advisorfor the ARM industry. For ARM service providers, our value-add servicesfocus on analysis, growth, and exit strategies. For credit grantors, ourfocus is on optimizing receivables management strategies. Kaulkin Infor-mation Systems creates secure and affordable workflow, document, andcompliance management technologies.About Persolvo Data SystemsEstablished in 2005, Persolvo Data Systems is the first patent-pending Persolvo Data Systemssystem to aggregate account information from debtors enrolled in debt Jeff Dickeysettlement programs. Persolvo aggregates account information from over EVP Sales and Marketing400 debt settlement companies with over $5 billion of debt settlement 713-828-5805account data available to creditors and collectors seeking to collect these jdickey@Persolvo.comaccounts. Persolvo’s web-based settlement application allows creditorsand collectors to locate debtors enrolled in debt settlement programs,analyze their account information to uncover highly-liquid settlementopportunities, and settle large numbers of accounts online with hundredsof debt settlement companies using Persolvo’s PCI Certified, web-basedsettlement application. The Persolvo system is the largest database ofaggregated debt settlement accounts available today and provides themost accurate and up-to-date information, including trust account sav-ings balances, on debtors enrolled in debt settlement programs. For moreinformation, visit our website at Latin Verb - to unloose, explain, expound/pay off a debt, pay.