Article

Minimizing Bad Debt Know When To Call A Collection Agency

May 2007, Auto Dealer Today - WebXclusive

by Michelle Dunn - Also by this author

Common circumstances rather than conscious delinquencies cause many customers to default on their automobile payments.  This is something that sets automobile dealer delinquent accounts apart from any other type of collection account, such as retail or service debts.  The most common reason that customers default on auto loans is employment termination, voluntary or involuntary.  In the case of involuntary, unemployment benefits are either not available or not enough for them to sustain payments. 

Another common cause for delinquency is when customers suddenly incur unexpected expenses due to major health issues or vehicles requiring major vehicle repairs.  If customers were already struggling to make payments, they cannot make the payment AND pay for medical attention or repairs. 

If one of these circumstances arises and customers feel as though you are not working with them, they may file bankruptcy or stop all communications with your credit department if they are already drowning in debt.  Lack of communication is a red flag indicating that you should immediately pursue the account legally or place it with a collection agency. Before you get to this point, however, you need review the basic principles of granting credit. 

As a credit grantor, be aware of some basic principles:

  • Granting credit carries an unavoidable element of risk. You will have some losses regardless of how closely you screen applicants.
  • There are some fundamental procedures that can help in your collection efforts. While no collection procedures will completely cover all your needs, there are some general procedures that can assist you, regardless of the goods or services you provide.
  • Make certain both parties clearly understand the terms of the credit transactions when it is initiated.
  • Systematically and diligently follow up on every account.
  • Perform periodic age analysis of every outstanding account.

 Extending Credit

As a credit grantor, your business is one of many that allow consumers to use goods and services immediately and pay for them later. While extending credit increases your gross sales, it also puts you at risk of some losses due to nonpayment.

You don't have to accept excessive losses as an inherent part of doing business and extending credit. The fundamentals of establishing and maintaining effective controls over bad debt are comparatively simple, and it is possible to reduce these losses.

  • Implementing basic underwriting procedures can cut your losses in half if followed without exception.
  • Check all references, including landlords, employers, personal references and banks. 
  • Verify the employment dates customers give you before you sell them a vehicle, parts or perform extensive repairs on their vehicle. 
  • Obtain a co-signer if you do not feel comfortable with a person’s ability to pay for the vehicle or any services.  If a customer files bankruptcy, your options are limited UNLESS you have a co-signer because you can still pursue collections against a co-signer.

Quite often a debtor will stop paying for their vehicle if the vehicle stops running or needs repairs.  You should work with your customers to minimize vehicle down time so they continue to make their agreed upon payments.  I have seen instances where the customer will not pay parking or other tickets, and the police will impound the vehicle.  These debtors feel that they are no longer obligated to pay you if they are not in possession of the vehicle.   In these cases, at least you know where the collateral is and how to redeem it before pursuing further collections.

To increase the odds of collecting a past due account, place the account with a collection agency sooner.  The longer you wait, the slimmer the chances of collecting any part of the outstanding balance.

Identifying Bad Debt

You can keep bad debts to a minimum and have more success recovering them if you identify them early.  Early identification means reviewing your accounts on a regular cycle, at least weekly if not daily, to quickly identify those that are not paying as agreed.  Review their credit file again, and their payment history to determine if you have an actionable problem.  Your reaction at this point of your credit-collection procedures can mean the difference between recovery and loss. If you identify a potential bad debt, you need to act promptly and decisively according to your established credit and collection procedures. Usually the more time that passes, the less consumers pay.

Reducing Bad Debt

You should have a standard, in-house written policy on handling accounts. The policy should include when to call new customers, when to call established customers, when to send letters and when to turn accounts over to other collection sources.

You will find that most consumers will pay as agreed, while a certain number need a mild reminder. Some will encounter a change in economic situation that makes it difficult to pay, such as illness or loss of job. After a regular follow-up with these consumers, they will usually give insight into their financial situation and a promise to pay, and eventually they will fulfill this promise. A small number of consumers, will require more attention, but will eventually pay.

None of these consumers are our main concern. They are mentioned only to emphasize a simple, fundamental collection practice which is to keep the account current. This can usually only be achieved by giving each account proper and constant attention.

A successful in-house policy must:

  • Be tough yet flexible.
  • Have specific guidelines of action. 
  • Contain self-evaluation. 
  • Be consistently enforced.

Proper and consistent attention involves developing a collection schedule and following each step fully before moving on to the next step. It means that you never move backward or repeat a step with hopes of salvaging an account.

When to Hire a Professional Collector

As an account ages, the chances of collecting on it decrease dramatically. It's expensive to carry accounts that you will not be able to collect using the methods at your disposal. It's often a better use of your company's time and resources to concentrate on other aspects of your business.

A professional collection service can assist you in collecting accounts that remain delinquent. Collectors have a vast knowledge of collection techniques, technology and compliance issues. Using a professional collection service will save time and likely yield better results.

Here are some signs that you may need to work with a collection agency:

  1. A customer fails to make payment after receiving a default notice. The consumer will not or cannot pay. Potential losses may be minimized by prompt referral to a collection service. 
  2. Payment terms fail. In some cases irresponsible consumers pay when and if they want to. This group is responsible for 25 percent to 50 percent of the cost of collections. 
  3. The consumer makes repetitious, unfounded complaints. Such consumers are often better handled by collection specialists. 
  4. The consumer totally denies responsibility. Without professional help, these accounts are usually 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 or jobs. This group is responsible for 90 percent of all “skips.” A skip is defined as a customer who has moved without informing creditors of a forwarding address. 
  7. There is an unauthorized transfer or disposal of goods delivered in a conditional sales contract. Often, only prompt professional assistance can make any recovery.

Selecting a Qualified Agency

You should choose a qualified professional collection agency to manage delinquent accounts. The agency should represent your organization in a responsible and professional manner, and provide a satisfactory rate of recovery while maintaining your public image. This decision involves more than just giving your business to the lowest bidder. Consider the following qualifications and credentials when choosing a collection service:

  • Is the agency a member of a national trade association? Membership is an indication of professional integrity. 
  • Does the agency belong to a local Chamber of Commerce? 
  • Are the fees the agency charges clearly stated? 
  • Is the agency prepared to give the best possible service? An agency cannot guarantee results on any specific date, but will often estimate an average recovery rate that one can expect. 
  • Will the agency be sensitive to a consumer's individual situation? The agency should promptly notify you when it discovers a consumer who is a true hardship case and recommend a proper procedure to follow.
  • Make sure that the collection agency is fully acquainted with the automotive industry. Professional collection services are personal in nature. If the collection service is familiar with the goods and services your dealership provides, it will be better suited to handle the complex situations that arise during collection.

Working with a Collection Agency

If you choose to turn your accounts over to a collection agency, provide complete and accurate information about the account. In all cases, the minimum information should include:

  • The correct name, address and telephone number of the debtor 
  • Name of debtors spouse 
  • Whether mail has been returned 
  • Debtors occupation, or last known occupation, and phone number 
  • Names of relatives, friends and references 
  • Summary of any disputes 
  • Date of last transaction 
  • Cellular phone, fax or any other means of reaching the debtor 
  • Nicknames or aliases and a maiden name if applicable

Cooperate with your collection service. Rely on the experience, diligence and judgment of your collection service for the best and quickest results.  Relay any developments on the assigned accounts to the collector promptly. Do not place an account with more than one collection service. If you change collection agencies make sure that the account is only being worked by one service.

Minimize your risk by implementing the proper underwriting techniques and complete in-house collection procedures. Then, maximize your bad debt collection potential by carefully selecting a collection agency and turn accounts over to them in a timely manner.

Vol 4, Issue 3

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