Editor's Note: This article originally appeared on the TrueAccord Blog and is republished here with permission.
Managing accounts and ensuring regular payments is an essential part of being a functioning business. This is especially true for small businesses where several small payments (or one large payment) being past-due can make a massive difference. Many companies will put off hiring a collection agency until they have defaulted accounts rather than creating a partnership at an earlier delinquent stage that can grow as needed.
When it comes to maintaining consistent payments, all parties involved—from the creditor to the consumer—would rather keep accounts up to date than not. When consumers’ financial situations are impacted, and they are unable to make payments for a long period of time, their defaulted accounts are “charged off” and considered a loss by the creditor, and sometimes a partnership with a debt collection agency begins.
This is the model for a large number of businesses, but collections can begin sooner and account balances can be resolved more quickly to the benefit of everyone. So why aren’t more businesses seeking to collect in the pre-charge off world? Here are three major challenges that make managing early-stage (aka pre-charge off) collections more difficult to collect than post-charge off balances.
What is the difference between pre- and post-charge off debt?
In order to understand the difficulties that come with pre-charge off collections, we first have to understand the clear differences between pre- and post- from the creditors’ point of view.
As mentioned above, pre-charge off or early-stage debt can include overdue payments, previous payment minimums, late payment fees, and interest. These payments had specific due dates and specific amounts due on those dates which the consumer did not meet.
Consumers that are not able to meet these minimum monthly payments or similar terms are subject to potentially having their line of credit limited, additional interest and fees, negative entries on their credit report, and losing access to the credit altogether. Once a late payment extends beyond a certain window of time (typically six months from the date of delinquency) the account is “charged off.”
Post-charge off (also known as late-stage collections) is comprised of the total account balance plus any interest and fees accrued after the customer stopped making payments throughout the pre-charge off period. Late-stage payment plans can provide a bit more flexibility in their payment terms.
This is in part because the creditor is unsure as to whether or not they can recover any of the missing payments and because the delinquency has already been added to the consumer’s credit report during the pre-charge-off stage. As long as the consumer sets up a payment plan, a business has little need to pursue further action such as filing a lawsuit.
Some of these differences highlight the challenges posed to companies and debt collection agencies looking to collect early stage payments.
Minimizing roll rates
The key metric in the early stage collections space is the roll rate of your accounts. Roll rates measure the percentage of accounts that shift from one bucket to the next, typically in 30-day increments (e.g. payments that are 60 days overdue could shift to the 90 days overdue bucket and increase the rate).
In the post-charge off space, where collection volume is a leading indicator of recovery, it can be easier to judge the efficiency and performance of collections efforts. Pre-charge off work requires faster action because accounts can quickly roll from bucket to bucket.
The urgency of due dates
Part of the challenge of reducing roll rates is rooted in the more urgent nature of early-stage collections. Accounts that have reached late-stage collections have been overdue for 180 days or more and have already been reported on a consumer’s credit report.
Pre-charged off accounts can involve collecting payments on accounts 1 or 2 days past due. The longer these accounts go unpaid, the longer they harm the creditor’s bottom line and the longer they can accrue interest, late fees, and negative credit reporting for consumers. An urgency exists for the creditor to remind a consumer of the missed payment obligation and understand if a consumer is experiencing a financial hardship and for the consumer to avoid further delinquency or even default.
Increased call volume
Traditional call-to-collect debt collection agencies that work in the post-charge off world already work to meet enormous contact demands. While digital debt collection agencies and tools can help to dramatically reduce the need for agent-driven call centers, pre-charge off collections requires additional support that benefits from a digital strategy.
Due to the urgency of early-stage collections needs and the compounding nature of late fees and growing interest, a larger percentage of consumers reach out to discuss possibility of waiving late fees or receiving some one-time relief from their assistance. In order to meet the increased demand for these communications agencies must prepare to scale their teams and systems appropriately and manage rapidly expanding consumer needs.
To eyes outside of the collections industry, collecting debts may appear to be uniform, but adapting to work with both pre- and post-charge off debts takes substantial changes to a company or agency’s infrastructure. Partnering with a company with an established history of effective scalability and growth can smooth the transition and help your business grow.