SIC 7322
ADJUSTMENT AND COLLECTION SERVICES



This category covers establishments primarily engaged in the collection or adjustment of claims other than insurance. Establishments primarily engaged in providing credit card service with collection by a central agency are classified in SIC 6153: Short-term Business Credit Institutions, Except Agricultural; those providing adjustment services are classified in SIC 6411: Insurance Agents, Brokers, and Service; and those providing debt counseling or adjustment services to individuals are classified in SIC 7299: Miscellaneous Personal Services, Not Elsewhere Classified.

NAICS Code(s)

561440 (Collection Agencies)

561491 (Repossession Services)

Industry Snapshot

Debt collectors are businesses acting as third-party agents to recover outstanding debts from consumers and businesses. Most credit grantors initially attempt to collect the money due using their in-house collection departments. At some point, however, it becomes more economical to hand over past-due accounts to a collection company. In turn, the agency works to recover the amount still owed and is paid a percentage of the amount received. According to the American Collectors Association (ACA), in 1997, more than $32.2 billion in outstanding debt was collected — out of the $247.4 billion in new accounts turned over that year to third-party collection agencies.

The debt collection industry has grown from small, localized businesses to nationwide companies. The industry has also become more regulated with the implementation of the Fair Debt Collection Act of 1977. This legislation mandates behavioral guidelines for creditors. Violations of the act are reported to the Federal Trade Commission (FTC). In addition, the majority of states also regulate debt collection agencies through state licensing, registration, or certification of the right to conduct business within a particular state.

Debt collection industry leaders have been large, computerized agencies, such as the NCO Group and Outsourcing Solutions. Beyond the few major national corporations such as these, the remaining companies in the industry are small, local, private companies.

Organization and Structure

Collection and accounts receivable management agencies are third-party agents that assist in recovering delinquent or written-off debt. Although most large corporations have their own internal collection departments, a creditor will typically release the debt to a collection agency after the account is 180 to 240 days in arrears. Third-party agents can generally provide more effective service at a lower cost than in-house personnel. Collection agencies usually are compensated by commission, based on the percentage of debt recovered.

Some collection agencies market a prepaid letter service that includes dunning notices and related reporting and collecting services. This type of service generally has been used by smaller businesses and organizations. With a letter service, the client prepays a flat fee rather than paying through a percentage of the money collected. The more traditional collection service operates through the activities of the contingency collection agencies, working on commission and earning 25 to 35 percent of the amount collected.

The debt collection industry can be divided into four main groups: health care, including hospitals and doctor's offices; retail businesses, including department stores and credit-card companies; utilities; and commercial accounts, or businesses owing money to other businesses. Hospitals and bank cards have provided the greatest amount of overdue debt collection placements. Various health services and utilities also have become large users of collection agencies. Education and government-backed loans, both relatively new categories, have also grown. Previously, debt collectors lacked the staff or expertise to handle these kinds of accounts.

Background and Development

The debt collection industry, often called accounts receivable management, was traditionally characterized by small, local businesses with shady reputations at best. However, since the late 1970s, the collection agency industry has transformed into nationwide companies with "hundreds of closely supervised collectors and computerized operations," reported Clifford J. Levy in a 1991 issue of The New York Times.

Changes in the appearance and activities of the debt collection industry have been due to two factors: the growth of national companies demanded that debt collectors operate on a national basis and have highly computerized facilities; and the implementation of the Fair Debt Collection Act of 1977. Administered by the Federal Trade Commission (FTC), this legislation has determined specific rules of conduct for debt collectors. According to the act, debt collectors cannot threaten debtors, lie to them, or call them at inappropriate times. Conversations and correspondence with debtors are to be confidential, and debtors can tell collectors to stop contacting them. As a result of the act, less-than-professional operators have been pressured to upgrade their practices or have been forced out of business.

Despite the Debt Collection Act, complaints have been on the rise in the early 1990s. In fact, consumers filed 2,000 debt-collection complaints with the FTC in 1992, double the amount filed in 1991. However, this figure remains well below the 5,000 complaints received annually before 1977. One example of debt collection harassment has been the case that the FTC brought against Payco American in August 1993. The company was charged with using abusive language, falsely threatening arrest, and improperly revealing personal financial information to outsiders. All of these charges are in violation of the Debt Collection Act.

Due to government regulations and the emergence of national, commercial, institutional, and government accounts, the debt collection industry experienced consolidation between the 1970s and 1990s. The result was a decline in the number of debt collection agencies in operation, from about 6,500 at the end of the 1970s to approximately 5,500 to 6,000 in 1994. Industry revenues grew from roughly $2.5 billion to around $5.5 billion during the same time period. Higher revenues fueled more growth in the number of collection agencies in 1995 to 7,400 nationwide, again increasing the number of establishments in this industry.

Current Conditions

The American Collectors Association (ACA) compiles and publicizes statistics on the nation's consumer debt. By the late 1990s, the average consumer debt was $300. Outstanding consumer installment debt totaled $1.3 trillion as of March, 1999. There were nearly 152 million credit card holders in 1998, with total outstanding credit card debt reaching $538 billion. About 1.4 million consumers, or 8 percent of Americans, filed for bankruptcy in 1998. In 1996, more than $13 billion in bounced checks were written, a total projected to rise annually by 2 to 4 percent through 2020. Additionally, 496 million fraudulent, or forged, checks were written in 1997, valued at $9.9 billion.

Aside from commerce-based debt, Americans owe large amounts of money in other markets. The ACA reports that the U.S. General Accounting Office totals child support delinquencies in excess of $56 billion, although other estimates place the total closer to $200 billion. Only about 22 percent of such debt is currently recovered by state governments, but that percentage is anticipated to improve with the utilization of private collection agencies. Private agencies are also employed by the government in collecting its own outstanding debt in the form of taxes, fines, fees, overpayments, and student loans. By the end of 1997, about $259 billion in non-tax debt was owed to the federal government, while the Internal Revenue Service was owed another $110 billion. Due to steadily increasing college tuition costs, the amount of student loan debt has skyrocketed. During 1995, the U.S. Department of Justice filed about 1,140 student loan default cases in federal court — in 1998 it filed 14,080 such cases. As of September, 1997, the U.S. Department of Education was owed $44.7 billion.

One of the strongest factors in determining the collectability of a debt is the timetable for turning an account over to a collection agency. Generally, the rule has been "the sooner, the better." When a loan is 90 days overdue, a 75 percent chance of collecting exists, but the odds fall .5 percent with each passing day. By the time a loan is 180 days or six months past due, the chance for recovery has dropped to 30 percent. After a year, it is less than 10 percent.

Industry Leaders

The NCO Group, Inc. was the world's largest provider of accounts receivable collection services, a position that it claimed through its August, 1999, acquisition of Compass International Services Corp. The Pennsylvania-based firm had grown rapidly by acquiring rivals, adding some 15 companies to its stable since the mid 1990s. In addition to bad debt recovery, NCO also offered such services as billing, customer service and support, delinquency management, and marketing strategy, research, sales, and fulfillment. The firm operated from call centers throughout the United States and the Caribbean, as well as in Canada and the United Kingdom, where it operated under the name Financial Collection Agencies (FCA). NCO's revenue for 1998 reached $179 million; this increase of 109.9 percent over the previous year was principally attributable to the acquisition of such companies as MedSource Inc. and FCA International Ltd.

By the late 1990s, Outsourcing Solutions Inc. was a leading provider of debt collection and accounts receivable management services. Founded in 1995, the Missouri-based company operated more than 60 call centers in the United States, generating nearly $480 million in revenue in 1998. The privately-held company also offered such services as billing, contract management, portfolio purchasing, customer service, and market research.

Workforce

The 1998-99 Occupational Outlook Handbook reports that approximately 260,000 Americans were employed as bill and account collectors in 1996. About 16 percent worked for third-party credit reporting and collection agencies, with the remainder employed directly for institutions, such as banks and retail stores, that extend credit. Employees typically worked on commission, earning a percentage of what they collect from pastdue accounts. Agency employees usually are paid a salary and commission, which varies among companies. In 1996, the median salary was $410. The Occupational Outlook Handbook projects that employment in the industry is expected to grow significantly faster than the national average through 2006, as the amount of consumer debt increases. In an attempt to produce a more professional and well-trained workforce, the ACA conducts 250 seminars a year for its members and their employees and administers certification and degree programs for advanced training in professional collections.

Research and Technology

Computer technology has provided tremendous assistance in making debt collection companies highly automated. Prior to the introduction of computers, debt collectors conducted their business entirely by paper. By the start of the 1980s, collectors started using computers to maintain files, call debtors, and search for addresses.

By the mid 1990s, large national debt collection agencies had turned into giant data processing centers. Computerized services common to the debt collection industry include automated phone dialing and file retrieval, access to national databases for address information, and customized collection methods. One example of an automated agency has been Atlanta-based Nationwide Credit. Nine hundred collectors work out of 11 offices using an automatic dialing service. This computerized system calls debtors until the phone is answered. Immediately, the call is sent to a collector while the debtor's credit history simultaneously appears on the collector's computer system. Collectors also are able to access national databases of addresses, information collected from telephone directories, subscription houses, and voter registration records.

Another example of the advances in computer technology is the development of Payment , a PC-based software program developed by GE Capital Corp. This program devises custom-made debt collection per debtor. First the software program downloads the debtor's credit and repayment history from a mainframe to the collector's PC. With this information, the software program calculates the best method for getting each debtor to pay the outstanding amount due. Using this program, GE Capital handled 300 private label credit cards, including R.H. Macy & Co., Montgomery Ward & Co., and Apple Computer Inc.

Further Reading

"Adjusters, Investigators, and Collectors." 1998-99 Occupational Outlook Handbook. Washington, D.C.: Bureau of Labor Statistics, 1999. Available from http://stats.bls.gov/ocohome.htm .

Collection Fact Sheets. Minneapolis: American Collectors Association, Inc., 2 December 1999. Available from http://www.collector.com/news/fact .

NCO Group, Inc. Web Site , 2 December 1999. Available from http://www.ncogroup.com .

Siwolop, Sana. "Spending It: Nasty Calls at 6:00 a.m.: Dunners Who Go Too Far." New York Times , 14 July 1996.

Wagenbrenner, Anne. "Collection Agencies, Attorneys to Help IRS Collect Tax Debts." Journal of Accountancy , June 1996.



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