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What the 2008 crisis can teach us about debt collection post-COVID

Jun 15, 2020 MicroBilt News

The COVID-19 pandemic didn’t exactly take anyone by surprise, but the rate it spread and shut down the U.S., the impact did come more abruptly than anyone thought it would. The restrictions put into place to alleviate the health crisis also have lasted a lot longer than initially believed.

As a result, businesses have had to rethink their plans going forward. Everything from reopening to debt collection will have to be carefully strategized.

Many Americans falling deeper into debt

Recently, the U.S. Federal Reserve bank revealed overall household debt increased by $155 billion during the first quarter of 2020. The pandemic led to more than 40 million people filing for unemployment, and it’s still uncertain how many of these jobs will be recovered once the health crisis is over. As a result, it may be difficult for some Americans to pay their outstanding bills and their debt will go into collection.

A recent FICO article points out the lessons that can be learned from the Great Recession, noting businesses can look to previous events to help “tackle some of the challenges” around debt collection and the coronavirus pandemic.

Value of identifying why consumers are in debt

In 2008, debt collectors failed to identify consumers who wouldn’t have been in collections had the recession not hit. Going forward, collectors should identify the groups of debtors who would ordinarily have paid their debt timely and look at these accounts a little differently. The average collection before the 2008 crash indicated it took 2.5 years from debt origin to selling the debt before any financial recovery could be achieved. After 2008, the period of return had dropped drastically to nine months – clearly showing many of the debtors had experienced short-term financial struggles and planned to repay their debt.

If businesses had understood customer behaviors before the financial crisis, they could have adapted their segmentation, strategies, policies, and solutions. Essentially, recovery could have been approached differently and avoided alienating otherwise good customers.

Pursuing collection and recovery going forward

Once restrictions are removed, true permanent loss of jobs is known, and how much debt Americans have accumulated is clearer, how businesses pursue collection and recovery will ultimately be shaped by these factors.

  • Understanding any federal, state, or local restrictions on debt collection.
  • Determining which debt is COVID-19-related and which debt isn’t.
  • Looking at customer data to see what their individual status was during the pandemic (e.g. working, furloughed, or ill).
  • Identifying which customers are likely to resume paying down debt as soon as they are able from ones who are truly high-risk.

Chances are debt volume will be higher in the near to immediate future. It will take coordination and cooperation from both the lender and the debtor to set things right again.

Going forward, the collection and recovery landscape may be shaped very differently as the country begins to emerge from the pandemic. MicroBilt has a suite of recovery and skip tracing tools to aid you as you determine which customers should be prioritized. Our tools include account segmentation to help you assess “collectability” enabling you to prioritize debts to pursue, along with people and address locators to assist you in your searches. To learn more about tools, contact us today.