Adjustment and Collection Services

SIC 7322

Companies in this industry

Industry report:

This category covers establishments primarily engaged in the collection or adjustment of claims other than insurance. Establishments primarily engaged in providing credit card service with collection by a central agency are classified in SIC 6153: Short-term Business Credit Institutions, Except Agricultural; those providing adjustment services are classified in SIC 6411: Insurance Agents, Brokers, and Service; and those providing debt counseling or adjustment services to individuals are classified in SIC 7299: Miscellaneous Personal Services, Not Elsewhere Classified.

Industry Snapshot

Debt collectors are businesses acting as third-party agents to recover outstanding debts from consumers and businesses. Most credit grantors initially attempt to collect the money due using their in-house collection departments. At some point, however, it becomes more economical to hand over past-due accounts to a collection company. In turn, the agency works to recover the amount still owed and is paid a percentage of the amount received. According to the Association of Credit and Collections Professionals International (ACA, formerly the American Collectors Association), in 2007, more than $721 million was recovered for the federal government alone. By 2010, there were 6,173 U.S. adjustment and collection services generating more than $9.2 billion in annual revenues in the United States, according to Dun & Bradstreet's Industry Reports.

The debt collection industry has grown from small, localized businesses to nationwide companies. The industry also became more regulated with the implementation of the Fair Debt Collection Act of 1977 and the subsequent passing of the Fair Debt Collection Practices Act (FDCPA) in 2004. This legislation mandates behavioral guidelines for creditors. Violations of the act are reported to the Federal Trade Commission (FTC). In addition, the majority of states also regulate debt collection agencies through state licensing, registration, or certification of the right to conduct business within a particular state.

Debt collection industry leaders have been large, computerized agencies, such as the NCO Group and iQor Inc. Beyond the few major national corporations such as these, the remaining companies in the industry are small, local, private companies.

Organization and Structure

Collection and accounts receivable management agencies are third-party agents that assist in recovering delinquent or written-off debt. Although most large corporations have their own internal collection departments, a creditor will typically release the debt to a collection agency after the account is 180 to 240 days in arrears. Third-party agents can generally provide more effective service at a lower cost than in-house personnel. Collection agencies usually are compensated by commission, based on the percentage of debt recovered.

Some collection agencies market a prepaid letter service that includes dunning notices and related reporting and collecting services. This type of service generally has been used by smaller businesses and organizations. With a letter service, the client prepays a flat fee rather than paying through a percentage of the money collected. The more traditional collection service operates through the activities of the contingency collection agencies, working on commission and earning 25 to 35 percent of the amount collected.

The debt collection industry can be divided into four main groups: health care, including hospitals and doctor's offices; retail businesses, including department stores and credit-card companies; utilities; and commercial accounts, or businesses owing money to other businesses. Hospitals and bank cards have provided the greatest amount of overdue debt collection placements. Various health services and utilities also have become large users of collection agencies. Education and government-backed loans, both relatively new categories, have also grown. Previously, debt collectors lacked the staff or expertise to handle these kinds of accounts.

Background and Development

The debt collection industry, often called accounts receivable management, was traditionally characterized by small, local businesses with shady reputations at best. However, since the late 1970s, the collection agency industry has transformed into nationwide companies with "hundreds of closely supervised collectors and computerized operations," reported Clifford J. Levy in a 1991 issue of The New York Times.

Changes in the appearance and activities of the debt collection industry have been due to two factors: the growth of national companies, which demanded that debt collectors operate on a national basis and have highly computerized facilities; and the implementation of the Fair Debt Collection Act of 1977. Administered by the Federal Trade Commission (FTC), this legislation has determined specific rules of conduct for debt collectors. According to the act, debt collectors cannot threaten debtors, lie to them, or call them at inappropriate times. Conversations and correspondence with debtors are to be confidential, and debtors can tell collectors to stop contacting them. As a result of the act, less-than-professional operators have been pressured to upgrade their practices or have been forced out of business.

Despite the Debt Collection Act, complaints began rising in the early 1990s. In fact, consumers filed 2,000 debt-collection complaints with the FTC in 1992, double the amount filed in 1991. However, this figure remained well below the 5,000 complaints received annually before 1977. One example of debt collection harassment was the case that the FTC brought against Payco American in August 1993. The company was charged with using abusive language, falsely threatening arrest, and improperly revealing personal financial information to outsiders. All of these charges were in violation of the Debt Collection Act.

Due to government regulations and the emergence of national, commercial, institutional, and government accounts, the debt collection industry experienced consolidation between the 1970s and 1990s. The result was a decline in the number of debt collection agencies in operation, from about 6,500 at the end of the 1970s to approximately 5,500 to 6,000 in 1994. Industry revenues grew from roughly $2.5 billion to around $5.5 billion during the same time period. Higher revenues fueled more growth in the number of collection agencies in 1995 to 7,400 nationwide, again increasing the number of establishments in this industry.

By the late 1990s, outstanding consumer installment debt totaled $1.3 trillion. There were nearly 152 million credit card holders in 1998, with total outstanding credit card debt reaching $538 billion. About 1.4 million consumers, or 8 percent of Americans, filed for bankruptcy in 1998. In 1996, more than $13 billion in bounced checks were written. Additionally, 496 million fraudulent, or forged, checks were written in 1997, valued at $9.9 billion.

Aside from commerce-based debt, Americans owed large amounts of money in other markets. The ACA reported that the U.S. General Accounting Office totaled child support delinquencies in excess of $56 billion, although other estimates placed the total closer to $200 billion. Only about 22 percent of such debt was recovered by state governments, but that percentage was anticipated to improve with the utilization of private collection agencies. Private agencies were also employed by the government in collecting its own outstanding debt in the form of taxes, fines, fees, overpayments, and student loans. By the end of 1997, about $259 billion in non-tax debt was owed to the federal government, while the Internal Revenue Service was owed another $110 billion. In 2004 the American Jobs Creation Act authorized the IRS to contract with private collection agencies to collect an estimated $340 billion in delinquent taxes.

Due to steadily increasing college tuition costs, the amount of student loan debt also skyrocketed. During 1995, the U.S. Department of Justice filed about 1,140 student loan default cases in federal court; in 1998, it filed 14,080 such cases. As of September 1997, the U.S. Department of Education was owed $44.7 billion. These figures continued to rise throughout the 2000s.

One of the strongest factors in determining the collectability of a debt is the timetable for turning an account over to a collection agency. Generally, the rule has been "the sooner, the better." When a loan is 90 days overdue, a 75 percent chance of collecting exists, but the odds fall half a percent with each passing day. By the time a loan is 180 days or six months past due, the chance for recovery has dropped to 30 percent. After a year, it is less than 10 percent.

With continued growth in consumer credit nationwide, the collections industry grew in the 2000s. Although the number of collections agencies fell from 5,814 in 1992 to 5,215 in 2002 due to industry consolidation, the amount those agencies collected rose from $3.7 billion in 1992 to $8.8 billion in 2002. Because of this, collections agencies adopted sophisticated new ways to manage their growing number of accounts. Electronic document management and Internet access for clients to track the agencies' progress in real time were two of the ways some companies were utilizing technology to aid their businesses.

Debt-sales was another big trend in the mid-2000s. Both public and private investors were increasingly buying debt. Of the increasingly popular debt-sales, Julie McMurtrey, vice president of strategic initiatives for TSYS Debt Management said in Credit Card Management, "It's not either/or anymore. A creditor might want to outsource, collect in-house and, with some accounts, sell them and not work them at all." McMurtrey's company also offered new software that could accommodate such strategies.

Collection agencies were also going online to collect money in the mid-2000s. Due to legislation such as the Do-Not-Call list and the proliferation of cell phones, there was a reduction in the ability of agencies to contact debtors. Websites popped up where delinquent credit card holders could settle their debts, a system first utilized by Bank of America in 2001. The service offered convenience and round-the-clock availability.

Current Conditions

While many businesses struggled to survive during the economic recession of the late 2000s, those in the debt collection industry stayed busy. According to the Bureau of Labor Statistics, "the number of collections jobs tends to remain stable and even grow during economic downturns. When the economy suffers, individuals and businesses struggle to meet their financial obligations." This, in turn, increases the demand for debt collection services. According to the ACA, debt collection agencies returned $40.4 billion in creditors in 2007.

As consumer debt soared, so did the number of bankruptcies filed. Between 1986 and 2008, the number of personal bankruptcies filed annually in the United States more than tripled. Although consumer bankruptcies represented 97 percent of all filings, business bankruptcies increased during the late 2000s. The largest corporate bankruptcy in history occurred in 2008 when Lehman Brothers Holding Co. went under with $619 billion in prebankruptcy assets.

By 2010, there was $1.3 trillion in delinquent household debt in the United States. In August 2010, consumers' average credit card debt was $7,694. In addition, due to the subprime mortgage crisis, many Americans struggled to keep their homes, with 457,000 receiving foreclosure notices between July 1 and September 30, 2010, alone. According to Donghoon Lee of the Research and Statistics Group, by the end of 2010 consumer debt was declining.

Nevertheless, the debt collection industry was expected to grow into the 2010s, particularly in the health care sector, where costs continued to rise. According to the ACA, health care premiums increased 131 percent between 1999 and 2008, and 41 percent of Americans surveyed reported that they had medical debt or trouble paying medical bills. As of January 2011, bad debt from unpaid medical bills totaled somewhere between $45 billion and $65 billion, an increase of 8 to 13 percent since 2008.

Lawsuits also continued to plague the industry. In 2009, consumers filed 12,986 lawsuits against collection agencies, including 9,959 that cited violations of the Fair Debt Collection Practices Act (FDCPA). These figures represented an increase from 2008, when 8,287 lawsuits were filed, of which 5,188 involved FDCPA infractions.

Industry Leaders

The NCO Group, Inc. was the world's largest provider of accounts receivable collection services in 2010, a position that it claimed through its August 1999, acquisition of Compass International Services Corp. The Pennsylvania-based firm grew rapidly by acquiring rivals. In addition to bad debt recovery, NCO also offered such services as billing, customer service and support, delinquency management, marketing strategy, research, sales, and fulfillment. The firm operated from call centers throughout the United States as well as Guatemala, India, and other countries. NCO nearly doubled its size when it acquired its chief rival Outsourcing Solutions Inc. in 2008. By the end of the first decade of the twenty-first century, the NCO Group had 32,900 workers. Sales for the company totaled more than $1.5 billion in 2009.

Other companies that were significant in the industry included iQor Inc. of New York. With 10,500 employees, IQor operated call centers throughout the world and reported sales of $348 million in 2009.

Workforce

The Bureau of Labor Statistic's Occupational Outlook Handbook reported that approximately 411,000 Americans were employed as bill and account collectors in 2008. About 25 percent worked in business support systems; 19 percent worked in finance and insurance; and 18 percent for health care and social assistance providers. Employees typically work on commission, earning a percentage of what they collect from past-due accounts. Agency employees usually are paid a salary and commission, which varies among companies. The average wage for a bill and account collector was $14.73 in 2008. Employment was expected to grow about 19 percent by 2018, as cash flow becomes of increasing importance to companies who wish to collect bad debts sooner. In an attempt to produce a more professional and well-trained workforce, the ACA conducts 250 seminars a year for its members and their employees and administers certification and degree programs for advanced training in professional collections.

Research and Technology

Computer technology provided tremendous assistance in making debt collection companies highly automated. Prior to the introduction of computers, debt collectors conducted their business entirely by paper. By the start of the 1980s, collectors were using computers to maintain files, call debtors, and search for addresses.

By the mid-1990s, large national debt collection agencies had turned into giant data processing centers. Computerized services common to the debt collection industry include automated phone dialing and file retrieval, access to national databases for address information, and customized collection methods. One example of an automated agency was Atlanta-based Nationwide Credit. Nine hundred collectors worked out of 11 offices using an automatic dialing service. This computerized system called debtors until the phone was answered. Immediately, the call was sent to a collector while the debtor's credit history simultaneously appeared on the collector's computer system. Collectors also are able to access national databases of addresses, information collected from telephone directories, subscription houses, and voter registration records.

Another example of the advances in computer technology is the development of Payment, a PC-based software program developed by GE Capital Corp. This program devises custom-made debt collection per debtor. First the software program downloads the debtor's credit and repayment history from a mainframe to the collector's PC. With this information, the software program calculates the best method for getting each debtor to pay the outstanding amount due. Using this program, GE Capital handled 300 private label credit cards, including R.H. Macy & Co., Montgomery Ward & Co., and Apple Computer Inc.

A proliferation of sophisticated software programs and online collections websites as a result of stricter phone laws and cell phone use were the standard in the 2000s. However, such software was also coming under scrutiny. In a September 2004, article in Credit Card Management, Andrew Postell, director of collections for ChoicePoint, a firm that sold its Debtor Discovery software to the industry and since has been acquired by Reed Elsevier, said, "Many companies forgot to focus on the fundamentals of collecting, instead relying too much on tools such as predictive dialers while ignoring the human elements."

© COPYRIGHT 2018 The Gale Group, Inc. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. For permission to reuse this article, contact the Copyright Clearance Center.

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