Dire Economic Conditions Impacting Legal Debt Collections

Debt collection agencies aren’t the only members of the accounts receivable management industry feeling the brunt of the economic downturn. Collection law firms are increasingly seeing their judgments rendered moot by consumers that are unable to pay.

In today’s economic environment, many consumers aren’t taken to court because they intentionally choose not to pay their debts, according to Cincinnati-based Slovin & Associates partner Randy Slovin. Many may want to pay their debts, but are stuck between a rock and a hard place as they decipher which bills need to be paid over others.

The consumer situation makes receiving a favorable judgment through the courts ineffective.  “The judgment by itself doesn’t get you paid,” Slovin said.

A lack of funds only makes the old tactics of collecting monies from debtors null as unemployment jumps higher each day. Collection lawyers no longer have the ability to attach and garnish wages, because there is nothing to attach. Many consumers have already lost massive amounts of their personal goods and property through foreclosure, leins on real estate, repossession and other actions, leaving legal collectors without any resources to collect funds owed.

According to Slovin, there are four trends currently emerging in the legal collections channel in this economy:

• B2B law suits — Companies are more likely to sue other companies to avoid going out of business.
• Creditor/consumer cooperation — Creditors are working with consumers by extending their payments over longer periods of time. 
• Rising court costs — Courts are raising the costs on filing lawsuits. 
• Debtor friendly judges — Judges are more sympathetic to consumers in the current climate.

Yet even in the face of difficult-to-enforce judgments, law firms are seeing more debt collection cases.

“We find that the load of cases has increased,” said Bill Stein, managing partner at New York-based Stein & Stein. “We feel like we’re working harder, but standing in place, because as we get new work, it’s harder to collect on the cases we have.”

In preliminary results from insideARM’s Credit and Debt Collection Confidence Survey for the fourth quarter of 2008, many respondents indicated that they are using the legal collection channel more in the tough recovery environment (“’More Payment Plans and Legal Collections,’ Say ARM Companies in Survey,” Jan. 27)

Kaulkin Ginsberg Director Mark Russell gave a couple of reasons for the up-tick in debt collection lawsuits. He said, “I believe that the rise in collections lawsuits is happening for two reasons: 1) collectors want to be top of mind with debtors, and 2) because we are heading into tax return season and creditors and debt buyers may be pursuing judgments more aggressively to utilize tax returns to resolve outstanding debt.”

Given that more debtors are being taken to court, the legal collections environment is not as harsh as it may seem to be.

According to Stein, “I think the smart creditors are flexible. They’re seeing that there’s no reason in driving their customers out of business, they know that doesn’t get them paid. They’re prepared to extend them a little more time then they might have otherwise in the hope they can keep the relationship going and eventually collect what’s due.”

Like businesses, consumers are also getting a break from the stereotypically horrid pursuits of debt collection lawyers. “Courts feel they’d like to see us resolve something amicably; certainly some have more sympathy towards consumers,” Stein said.