LOUIS MOSSEY IS THE
kind of guy who pays his bills on time. He tends to his impeccable credit history the way a gardener cares for a flower bed. He wouldn't dream of dodging a debt. So what's up with the collection letters? First, there was a threatening note from an agency representing Blockbuster Video. Mossey couldn't help but roll his eyes when he found it in the mailbox. After all, he was planning to pay the $8 late fee the next time he rented a movie. "I thought it was the silliest thing I'd ever seen," he says. "Then I got the notice from Green Mountain Power." Green Mountain Power is a utility that serves a quarter of Vermont, including, until recently, Louis Mossey. When Mossey moved last year, he dutifully called Green Mountain to pay the final bill. Apparently, there was a snafu. Several months later he got a notice from Green Mountain's collection agency demanding the now-overdue balance. The grand total: $1.28. Mossey, a man with a fine sense of humor, immediately phoned the agency and offered a deal: "Can I pay this on the installment plan?"
It's often not intentional, but even the most responsible consumers sometimes have a few pesky debts they've neglected to pay. Maybe it's the parking ticket rotting in the back of the glove compartment, or the $55 owed the doctor while the insurance tangle gets unknotted. For decades consumers put off these bothersome debts ad infinitum. After all, it's not like a brass-knuckled librarian was going to show up at your door to collect your $20 overdue-book fine. Until now.
If you think you've noticed an uptick in collection activity, it's not your imagination. New technology has sharply cut the cost of working a collection account, allowing agents to profitably pursue smaller debts. At the same time, collection firms are winning new business from cities and towns, targeting citizens who've neglected to pay municipal fines. And don't go thinking old debts are off limits there's a growing army of debt buyers who specialize in ancient loans that the original creditor has long since forgotten.
All told, the number of collection agents has doubled since the early '90s while industry revenue tripled, to $15 billion. Last year agencies recovered nearly $40 billion in debt that's $133 for every man, woman and child in the U.S. The upshot: Consumers are getting tough treatment over debts they'd long regarded as minor annoyances. These days everyone from your lawn-care man to part-time eBay entrepreneurs can find a collection agency willing to take their case. Government agencies in New York and Colorado recently hired collection firms to go after toll scofflaws. Even ex-cons are feeling the pinch. Pauline Kussart, owner of Madison, Wis., agency H.E. Stark, says she regularly gets business from county prisons who want former inmates to pay the tab for cigarettes and jailhouse haircuts.
The most obvious reason for the industry's growth: overspending. Since 2001, nonmortgage consumer debt grew 26%, to $2.3 trillion. Meanwhile, investors discovered that debt collection can be profitable in good times and bad. Following the dot-com crash, debt collection was a lone bright spot in the market; everyone from hedge funds to companies like General Electric got into the game. But it's not just industry heavyweights busting our kneecaps. There's also a growing number of one-man shops catering to small businesses that the big collection agencies won't bother with. As they've discovered, collections may be a tough business, but the barriers to entry are surprisingly low.
YOU WOULDN'T THINK Judy Angeramo's tiny agency in Deerfield Beach, Fla., represents the new wave in collections. Her one-room office, which shares a small plaza building with a Brazilian storefront church, houses a computer, a two-drawer file cabinet and a microwave oven purchased for $10 at the church rummage sale. But it's a busy place. Angeramo's clientele includes doctors, dentists, a horse trainer, a gym, several Christian schools ("You wouldn't believe the language that comes out of these people!"), two country clubs, a pool cleaner and a man who regrets making a $9,000 business loan to his buddy. In any given month, she processes roughly 1,500 collection claims. Multiply that by the hundreds of similar outfits opening across the nation, and you can understand why it's getting harder to dodge a debt.
Consultant and author Michelle Dunn says membership in her online networking forum for collection entrepreneurs has tripled in the past three years, to more than 1,000. Amazon.com sells a dozen titles like Robert Bills's How to Start a Home-Based Collection Agency. The word is out: It's easy to get started. In 18 states, including California and Ohio, you don't even need a license to start collecting, says Matt Pridemore, vice president of collection-licensing firm Cornerstone Support. Anyone with a phone and a computer can jump right in. And plenty do. According to Dunn, folks starting a collection agency these days include "prison guards, cops, office workers" people whose collection knowledge is often limited to the contents of a paperback book.
Angeramo had more experience than most when she launched Collection Results. Following stints as a Red Cross worker and loan secretary, she took a job with a friend who inherited an agency; before the year was over, she went solo. She got a Florida license, spent $1,500 on collection software, launched a simple Web site and opened the yellow pages to find customers. "I called every private school in the county," she says. Two years later she has 64 clients and is hiring part-time help. She's no Bill Gates, at least not yet: Monthly revenue averages $2,500 on collections of about $7,500. But Angeramo says she works six-day weeks because there's a larger cause at stake. Consumers rip off small businesses, she says, because they think they can get away with it and that's not fair. While she addresses debtors with brisk respect, her scorn for uncooperative deadbeats is obvious. "'I lost my job! My kid is sick!'" she hoots, mimicking their excuses. "We have a phrase for that: It's like they're throwing up on you. Ninety percent of the time, it's all lies anyway."
Angeramo doesn't let debtors know she's basically a one-woman show. Besides, it hardly matters. Just like the big agencies, she can report unpaid debts to the credit bureau: Getting access to the system was a matter of filling out an application, submitting to a background check and showing the credit-bureau inspector that she had a lock on the filing cabinet and a password on her computer. Now she can report anyone who's 30 days late. "And I never let anyone forget that," she says. It's no empty threat. When it comes to your credit rating, any collection action is bad news, even over a $60 dentist bill.
In a way, however, small agencies like Angeramo's hearken back to the days when collection was a time-consuming craft. While Angeramo dials the phone by hand and may spend several hours on a single account, you can be sure that the large agencies are far more efficient, not to mention crafty. Computer-assisted dialing helps their agents hound up to 15 debtors an hour, and sophisticated software lets them focus their efforts on accounts that are more likely to pay: Stable, high-income homeowners are profitable targets, says Rob Fite, who heads up collection technology for Fair Isaac. And good luck dodging the call the software even predicts what time you'll be home.
If you owe less than $100, the agency might do away with the live agent entirely. Instead, you'll get a call from a computer a digital voice demanding your credit card number. And the pi ce de r sistance? Virtual payment negotiations. These days debtors get letters telling them to go online and submit a payment schedule. After you offer, say, $500 a month, the omniscient computer will analyze your credit situation and either accept your offer or demand more, says Jeff Mains, CEO of software maker Sentinel. Thanks to all this technology, per-account costs can be whittled down from $20 to less than $2, allowing consumers to experience the joy of a collection call over a $13 gas bill.
One beneficiary of all this new technology: Uncle Sam and his minions. While towns and states have long relied on collection agencies to handle tax evaders, they're increasingly hiring help with everything else. Government receivables outsourced to collection agencies grew more than 30% over the past three years, says Nick Bernardo, head of consultancy Net Gain Marketing. Linebarger Goggan Blair & Sampson, a collection law firm with 1,800 government clients including the Internal Revenue Service, says its annual debt collection has doubled since 2001, to $1 billion, as cities ranging from Chicago to Tom Bean, Tex., (population 995) turn over everything from dog-bite fines to ambulance fees.
It all sounds a little goofy, until it happens to you. Three years ago Jeff and Terri Piland left their car in the no-parking zone at Denver International Airport to help a handicapped relative with his bags, then refused to pay the inevitable parking ticket. The Pilands didn't discover the black mark on their credit report until recently, when they applied for a home loan. Now they believe it helped put them out of the running for the mountain-view bungalow they'd been eyeing. "Someone else will be moving into that house, and that's hard for us," says Terri.
But nothing annoys consumers more than getting dinged by the library. Tamela Dunn was shocked last summer when she got a collection letter demanding payment for two cartoon books her 12-year-old son David borrowed from the Harford County, Md., library. "I remember when the library charged you a dime a day and that was the end of it," sniffs Dunn. Library manager Jane Eickhoff says patrons get six weeks and several notices before their accounts are turned over; she stands by the strategy. "We feel responsible to the taxpayers of Harford County," she says. At least it stops short of credit reporting. Its collection agency, Unique Management Services, says most of its 800 library clients request credit reporting over amounts as small as $10.
Perhaps the strangest birds in the crowded collection aviary are the debt buyers. Unlike agencies that recover debts for clients, debt buyers purchase loans from creditors and keep every penny they collect. The big debt-buying firms typically handle accounts that are relatively easy to collect fresh credit card and cell phone debt, for example, purchased directly from the creditor. But smaller outfits live on the fringes of the debt ecosystem, snapping up the right to collect on a random assortment of loans older than the Bush Administration. "We are the bottom-feeders," proudly declares Maverick Robinson, founder of Shapiro, Baines & Associates, a small debt-buying outfit in New Castle, Del. "We deal with the worst of the worst the oldest, dirtiest, most worthless stuff on the ground."
Robinson will buy and collect on just about anything medical bills, jewelry-store accounts, old gym memberships he usually works accounts that other collection firms have given up on. That's okay with Robinson. He buys debt so cheaply paying less than a penny on the dollar that he needs to collect only on a tiny percentage. Still, it's tough work. Consumers often have no legal obligation to pay those old debts, and credit bureaus don't include them on credit reports. To collect, Robinson employs all sorts of psychological tactics. "I studied Jim Jones and Hitler in college," he says. "I studied brainwashing. I perfected it."
When he makes a call, Robinson uses a weird, whiny voice that the debtor won't forget; he appeals to what he refers to as the person's "moral turpitude" their sense of shame. Since this tactic seems to works best on midwesterners, Robinson focuses on accounts originated in Iowa and the Dakotas. If a debtor is resistant, he often offers to settle the debt for a fraction of the full amount. Someone who incurred a $1,000 debt while in school, for example, will be offered "the student amnesty program we can settle this debt now for just $297.86." (The weird digits are a trick borrowed from Wal-Mart.) If all else fails, Robinson resells the debt on Bid4Assets.com, an online auction site that allows anyone with a credit card to buy consumer debt and collect it for themselves.
NO ONE ARGUES THAT Americans should dodge their debts when Joe Deadbeat doesn't pay his bills, the rest of us get stuck with higher prices. As the Association of Credit and Collection Professionals notes, the billions in debt recovered for creditors translates to $350 in savings per U.S. household per year.
Unfortunately, the collection trend creates problems for honest consumers. Thanks to the antics of cowboy debt buyers relying on dubious data, many people report getting calls about bills they paid years ago. At the same time, some companies are so eager to send accounts to collection that they neglect to fix billing snafus. "They get lazy with what they turn over," says Bethellen Keefe, a Florida collection-agency owner. No wonder consumer complaints to the Federal Trade Commission over collections rose 15% last year, to more than 66,000. However, collection agents don't have much incentive to help consumers untangle billing errors. Most rely heavily on a 15% to 20% commission an arrangement that encourages them to wrangle payments by any means necessary. Furthermore, few have much experience in the business. One large collection firm, Asset Acceptance, recently revealed that the annual turnover rate for new hires is a whopping 98.5%.
But as much as consumers complain, it's easy to see why companies will only want to see more collections activity. Last year debt recovery added $200,000 to the bottom line for Green Mountain Power, the Vermont utility that dunned Louis Mossey for his $1.28 shortfall. "For a small utility, it makes a difference," says Green Mountain spokesperson Dottie Schnure. And for some, it's a matter of sweet revenge. Palm Beach entrepreneur Victor Grosso, who hired Judy Angeramo to collect customer debts related to his $8-a-week dog-waste-removal service, says that while the numbers may be small, it's a matter of justice he deserves compensation for his work. And he can't help but sound a little thrilled as he reports his wealthy clients' reactions: "They freak out!" he says. "They don't think a little pooper-scooper company could send them to collections."