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Bad Debts on the Decline, But at the Cost of More Lawsuits

Account Receivable Management Article

July 23, 2012

Bad Debts on the Decline, But at the Cost of More Lawsuits

By Steve Anderson
Contributing TMCnet Writer


Bad debt is a sad part of any business' normal operations. From consumer debt to business debt, there will always be those who don't think they need to pay their debts. Or, failing that, are simply unable to pay them due to bad circumstances or business downturns. While bad debt in general is oddly falling off--a counter-intuitive happening to say the least in a bad economy--something else is on the rise to take its place: lawsuits over debt collection methods.

Essentially, a recent report from the Transactional Records Access Clearinghouse suggests that, while there is less bad debt than ever before, there are more lawsuits being filed in conjunction with companies pursuing what bad debt remains in the system by what is being regarded as illegal means. Until the lawsuits resolve, of course, they cannot actually be called illegal, but still, they go on apace.

Potential explanations for the spike in lawsuits run the gamut, from aggressive attorneys looking for a piece of the credit card industry to increased desperation on the part of the credit industry to get its hands on those last scraps of uncollected debt by any means necessary. But whatever explanation actually fits, the numbers are telling enough in their own right. 890 lawsuits were filed across the 90 federal court districts in the United States, according to the Transactional Records Access Clearinghouse, and that represents a 12.4 percent increase over the number filed in April. While the May 2012 figures are down from the May 2011 figures, the one inescapable fact that remains is that May 2012's figures represent an increase--moreover, part of a long string of increases that have been actively running since the beginning of this year--that doesn't show signs of slowing any time soon.

The debt collection industry, not surprisingly, suggests that the statistics should be viewed with a healthy dollop of skepticism, especially given that the overall bad debt in the system is falling off at a rapid pace. There's less bad debt in the system, they say, so why bother with illegal tactics is the common suggestion.

Some, like ACA International's director of public affairs, Mark Schiffman, suggest that the big gains in lawsuits are coming from what he calls a "cottage industry" of attorneys filing aggressive, but thoroughly bogus, lawsuits in a bid to get a settlement. Since many companies would sooner settle with the consumers than fight it out, the tactic appears to be working; after all, why risk a PR nightmare--the evil debt collectors that came after the poor widow's house--that a court case would no doubt launch when they could just call it all off? There's so little bad debt in the system to begin with, why not just write it off, maybe pay out a settlement, just to keep the whole thing from dragging on in the courts?

But Schiffman doesn't stop there, also citing unclear laws on the part of the recently-enacted Fair Debt Collection Policies Act, which is--according to Schiffman--rife with technicalities and loopholes that are practically bait to a hungry attorney.

Yet at the same time, some are pointing to reports of clearly illegal practices--harassment, badgering, outright threats--that are fueling the suits.

Just what's behind the suits is unclear, but there are more of them than ever. Debt companies will have to fight for every nickel they're owed, but the fight may well prove too costly to make it worthwhile.

Edited by Peter Bernstein

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