Many people believe a recession would be good for the debt collection industry. They think more debt leads to more collectible debt, more collections, higher returns to clients, and increased fees to debt collection firms.
Despite popular opinion, a recession does not benefit the debt collection industry or an individual business’s debt collection efforts. Economic instability will affect the collection of your receivables, but not for the better
Based on our experience navigating clients through the recessions of the early-90s and late-00s, recessions have a bad effect on debt collection rates and are bad for debt collectors and creditors alike.
Here’s how a recession might affect both consumer and commercial claims.
Consumer Claims
Recession or not, we are heading in the wrong direction when it comes to consumer claims.
Increases in food prices, housing costs, utilities, record-level credit card debt, and layoffs, signal the defaulted payments to come.
Defaulted payments are not only bad for a lender, they are bad for a borrower. The borrower’s default and high level of debt preclude them from borrowing more money.
New York recently enacted a number of consumer protection laws that affect debt collection. Some of these protections include:
- A shortened statute of limitations
- Limited available remedies to collect medical debt
- A decrease in the legal rate of interest
- Added additional requirements to institute suit
Commercial Claims
The financial impact in the consumer realm will definitely affect the collectibility of business debt. Here’s how.
Volume
As the level of debt increases, so will non-payment. Defaults in payment lead to an increase in the number of aged receivables, which would then lead to an increase in the number of outsourced receivables and the volume of debt collection lawsuits filed in the courts.
Even those creditors who have arbitration clauses in their contract may still need to confirm the arbitration awards in state court.
Speed
All debt collection cases filed with the New York courts are filed with the clerk of the court or other representative. Although there are different “parts” that hear commercial or self-represented consumer claims, the filings are made to the same systems.
Increased volume in the courts causes delays across the board. The longer it takes to obtain a judgment, the less likely you are to collect.
Given the increasing competition for the debtor’s purse, you’re better off auditing your debt collection processes sooner rather than later. If you have a debt collection matter you need to resolve, it’s in your best interest to act now. For assistance, contact Frank, Frank, Goldstein and Nager. We have the experience that pays.
