by Phillip Slater

There are many reasons to sell charged-off debt. But more importantly, what would selling charged-off debt bring to your financial institution in the way of benefits”? The answer may vary greatly depending on your goals. Sale proceeds could pay a year’s salary for an additional debt collector in your office or you could allocate the proceeds to reduce your cash outlay for loan loss reserves. You could even channel the funds into a branch face-lift or a full remodel.

Because credit unions have different needs at different times, there are several benefits realized by credit unions of all asset categories that have sold debt:

• Reduction in costs for off-site file storage
• Significant reduction in hard costs of 1099-C
• Immediate increase in annual recoveries
• Avoidance of FDCPA violations
• Reallocation of internal collectors efforts to accounts with real collection potential
• Provides a more realistic picture of collection agency results

Example
XYZ FCU charges off $1 million in delinquent consumer loans every year, and its collection agency has been getting the industry-average, 12-month recovery rate of 7 percent. Assuming the average of one-, two-, three- and four-year recovery rates of 7 percent, 2 percent, .5 percent and .3 percent, respectively, the total recovery percentage for the four year old loans is 9.8 percent. The agency gets 35 percent of recoveries, so the credit union’s net recovery is 6.37 percent of the $1 million. But, it took four years to get there.

If the same credit union sells the same charge-off debt after the first year of collections---a total of $930,000, which represents the remainder after agency handling---for a conservative 4 percent, that credit union would realize an immediate gross return of $37,200. Gross recoveries are now 10.72 percent, including agency recoveries and sale proceeds. Subtract agency and Broker fees and XYZCU’s actual recoveries are 7.43 percent for one year old paper. The end result is that XYZ FCU realized an increase in recoveries of 16.64 percent. And, it came three years sooner. Plus they realize the benefits outlined above.

About Au and AscendUnited.com
From strategy analysis and design, through implementation and results testing, Ascend United (AU) facilitates improvements to all phases of debt collection and recovery. AU offers a wide range of products for all types of financial services companies, including management of third-party collection programs, training, consulting and unique debt sales and services. Visit us on the web at www.ascendunited.com.

About Phillip Slater
Phillip Slater is Program Manager for Ascend United. He has been in the collections industry for more than 25 years and currently focuses on Au’s business development and consulting practice. His leadership has helped make Au the top selling broker of credit union debt in the United States. Contact Phil at pslater@ascendunited.com or 206/340-4843.