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Consumers and, in turn, the debt buying and collection industries were hit with a "double whammy" in 2007 and 2008 – a lack of available credit and unemployment, according to Lou DiPalma, managing partner with Garnet Capital Advisors, a Harrison, N.Y.-based debt buyer.
"People lived on credit and home equity [refinancing]. That game is over. They can't take home equity out. How much disposable income came out of a consumer's house? A lot," DiPalma tells Collections & Credit Risk.
Mike Varrichio, president of Global Acceptance Credit Co. (GACC), says unemployment has had a huge impact. Furthermore, he says that the national unemployment rate, which is hovering around 9.5%, is the best barometer for the debt buying industry.
"Not only does it indicate what the charge-off rate is going to be, it has a significant effect on collection liquidations rates," says Varrichio of the Arlington, Texas-based debt buyer.
"If you go back and look, you will notice similar trend lines for the charge-off rate and unemployment rate. Charge-offs go up to 10%, unemployment is right around 10%," he says. "While the supply side [of debt portfolios] is affected by that, the liquidation rates and the demand side [also] are affected negatively because consumers can't pay their debt if they're not working."
Liquidation rates for GACC have declined 40% in the past year, and anywhere between 25% and 60% for the industry, in general, Varrichio says. "It's pretty significant."
For updates on this topic, please see CCR Newsline and upcoming issues of Collections & Credit Risk.
