Looking Again At Whether Or Not To Sell Off Your Discharged Debt
Should your credit union sell off its charged-off debt?
To really answer that question, it's best to rephrase it: "What would selling charged-off debt bring my credit union in the way of benefits"?
The answers will vary according to your situation, but might include that the sale proceeds could pay an additional debt collector in your office for an entire year, you could allocate the proceeds to reducing your cash outlay for Loan Loss reserves, or even channel the funds into a branch face-lift or even a full remodel.
Credit unions have different specific needs at any given time. Here are just a few benefits realized by some of the credit unions with which I have worked. You will see that this list serves credit unions of nearly any asset size.
* Reduction in off-site file storage costs.
* Significant reduction in 1099-C hard costs.
* Immediate increase in annual recoveries.
* Avoidance of potential problems with FDCPA violations.
* Reallocation of internal collectors efforts to accounts with real collection potential.
* Provides a more realistic picture of collection agency results.
Let's look at a hypothetical example. XYZ FCU charges off $1 million in delinquent consumer loans every year. Its collection agency has been getting average results. The 12-month recovery rate is 7.00%. If we assume an agency four-year recovery rate of 7%, 2%, .5% and .3%, the total recovery percentage for the four-year-old loans is 9.8%. It takes four years to get there. The agency gets 35% of the recoveries, so the credit union's net recovery is 6.37%.
If XYZ FCU sells charge-offs after the first year totaling $930k (remainder after agency) for a conservative 4.0%, they realize an immediate gross amount of $37,200. Gross recoveries are now 10.72% including agency recoveries and sale proceeds. Subtract agency and broker fees and XYZ's actual recoveries are 7.43% for one-year-old paper.
The end result is that XYZ FCU realized an increase in recoveries of 16.69% three years earlier. Plus they realize the benefits outlined above.
Perhaps that best answers the question of why should you sell charged-off debt.
Phillip Slater has been in the collection and recovery industry for more than 20 years and has been involved in debt sales since 1999. Ascend United is a wholly-owned subsidiary of the Washington Credit Union League. Mr. Slater can be reached at 206-340-4843 or via email at pslater