Insights into Debt Collection Written by Ian James
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Debt Collection


The term ‘debt collector’ can conjure up some nasty imagery. What sort of person would do this for a living, preying on others who are in difficulty?

Well it isn’t like that in the real world.

Modern society increasingly relies on credit as a means of making sales to consumers before they have the cash to pay. The seller makes more profit, the consumer gets the benefit of the product, people are employed making the commodity and all round it seems to be a pretty good system.

What happens when one party to this transaction defaults? Most people who have ever tried to recover money through Australian courts realise that legal action is often uneconomical. Our legal systems are geared to slowness, with onerous rules for proving debts and ready defences available for avoiding repayment.

The only two requirements for successful debt collection are the capacity to pay combined with desire to pay, brought together at the same time in the same place. If either of these elements is missing, there will be no collection. If both of them are present, the debt will be collected.

The ideal way to collect money is to treat the recovery just like any other business transaction. Unfortunately individuals who are owed money often have emotions embroiled with the debt. These strong personal feelings can include a desire for vengeance when a conman has obtained their money, ambivalence when a family member has defaulted on a loan, and a variety of other unhelpful feelings. In these cases, the individuals would do well to place the recovery in the hands of a competent third party, a professional ‘debt collector’.

So if it is not a good long-term strategy to use the courts what else can you do?

Commercial debt collection is mostly straight-forward. Companies usually don’t pay because they can’t and demanding money from someone who can’t pay is futile. Therefore the first step is to engage a competent third party to collect the debt, and then negotiate a fee that will provide a reasonable result, both for you and for the debt collector.

Establishing the net present value of a debt involves being realistic and accepting that money recovered now, as opposed to the uncertainty of future repayment, is a much sounder proposition.

The debt collector’s task is then to collect the debt in a way which enables the debtor to pay it. This requires the debt collector to be understanding, to treat the debtor with dignity, and to establish a number of parameters for the actual collection, in a manner that is not dissimilar to an initial business transaction.

If a company has $10,000 a week available to pay its debts, and creditors want $50,000, then it will pay those that it chooses to. The skilful debt collector will ensure that their client is on top of that list.

Examining alternatives, such as payment in kind or product, accepting securities, and assisting the debtor to collect its own debts with an agreement that part of those proceeds will be paid to the creditor, are all part of the of an effective debt collector’s arsenal.

Establishing agreement that the debt is validly owed and that there are no counter-claims is essential at the outset. Taking accurate notes is also essential.

The key elements of effective collection are:

  • Establishing a relationship with the debtor;
  • Ensuring that the amount of the debt is agreed;
  • Negotiating with dignity;
  • Listening to the debtor;
  • Avoiding impossible demands;
  • Avoiding ultimatums;
  • Looking for alternative solutions;
  • Establishing the desire of the debtor to pay;
  • Committing agreements to writing; and
  • Controlling the collection.

There are call-centre debt collection companies that don’t visit and utilise bonus-driven callers who use rapidity of contact to entice payments. In commercial debt collection this type of approach may work, but is still no substitute for meeting face-to-face and establishing a business relationship for the transaction.

Debt collection is an art.

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