by Phillip Slater
Originally Published June 26, 2007

Milk, eggs, and bread all have "Sell By" dates on them because after that date, the product might be ok but the grocery store needs to pull it off the shelf and it no longer has value. They throw them out or return them to their supplier for credit.

Like the perishable items on a grocery store shelf, did you know that your collection department has perishable items on its shelf? No, I'm not talking about the yogurt, frozen entrees, and sandwich meat that amass in the break-room refrigerator. The perishables I'm referring to are in the collection queues.

Unlike perishable food products, collections accounts don't always come with a "Sell By" date to make it easy to decide what to do with them and when to do it. But, there are some simple rules to make it less challenging.

Autos
Why do creditors push to get repossessed vehicles sold as quickly as possible? After all, the vehicle isn't going to dissolve in the rain or rust away to nothing right before our eyes. It's done for one very simple reason: to avoid further loss. Almost every vehicle depreciates every single day. They want to maximize their recovery and minimize reconditioning costs so they can sell those cars just as quickly as possible.

Real Estate
Foreclosed property has similar time issues, but with an added twist. Real Estate loans are normally much larger than the average auto loan and tie up significant liquidity, which makes it unavailable for new loans. Foreclosures usually involve a substantial investment of time and money to get the property sold and off the books. The quicker these are sold, the faster that asset turns into new funds available for new loans.

Charge-offs and the Statute of Limitations
There are several items that you may not have considered perishable, including charged-off loans, leases, credit cards and share accounts. Yes, there is a very specific shelf life for these assets.

Based on industry averages, the longer a pool of accounts sits around not being collected the less that pool is worth in recovered dollars. This decrease in value is as predictable as how many seconds there are in a minute.

The highest value of a charged-off account is realized immediately after charge-off. This is when the account is most likely to make some type of significant payment toward the balance. The first placement of the account at a collection agency is the next most valuable period and then only for the first 90 to 120 days after placement. Afterwards, regardless of which agency it is placed with, the account receives very little work to collect it.

Every single day, the value drops incrementally until the "Sell By" date passes. Once that date has been reached, the value of that asset drops by over 90 percent. Overnight, you may have given away more than $90 of every $100 in value available for those accounts. This is due to something called the Statute of Limitations.

In Washington State, the statute time is six years for written contracts, which means that a creditor has six years to get an account collected before they are no longer allowed to use a judicial remedy and force collection. It also means they have 2,190 days to collect it before the value drops by that 90-percent number.

Simple Strategies, Maximum Results
Maximizing recovery of charge-off accounts results in benefits to current borrowers in several ways by:

• adding to the available pool for new loans to be made;

• lowering the actual costs of operating any lending program, thereby allowing for lower interest rates on loans of all types;

• providing reductions in loan loss reserves, making additional funds available for lending and other beneficial uses.

Realizing the value in charged-off accounts can be accelerated in a couple of ways: First, focus your collection efforts on the most recently charged-off accounts. It makes economic sense to put maximum effort into the area with the biggest return on your investment of time and money.

Second, push accounts out to a collection agency after a specific and short time period. Allow the agency a reasonable amount of time to collect the accounts. Once that time period has passed, and well before the "Sell By" date, sell those accounts. Pull the maximum recovery from every charged-off account.

Ask yourself this question: what other asset does your company knowingly allow to drop in value by 90 percent or more, simply by the ticking of the clock?

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.