Debt Collection & Recovery
Let’s face it, 2020 didn’t turn out exactly the way any of us envisioned it. The pandemic turned most of our lives upside down. It caused devastating effects to our daily routines, our families, our schools and our economy. Within the collection industry in the United States, State and Federal Governments imposed significant constraints because of COVID. In addition, many States and the IRS slowed or stopped the collection of tax debts, and the Federal Government gave significant deferrals for the repayment of student loans, mortgages, and rent. However, in some cases the pandemic actually helped collection agencies, because some people who received one-time government benefits from the CARES Act used that money to pay off their prior debts.
Hopefully 2021 will allow the majority of us to resume our normal lives (or at least our new normal lives) and enable many individuals and businesses devastated by the pandemic, to make a come back.
1. More Debts than Ever will need to be Collected
The payment deferrals enacted in 2020 will likely result in future repayment challenges once collection activities resume. While we would expect that lump sum payment will not be required to make up for the deferred payments, the missed payments will need to be repaid over time, which could result in higher monthly installments being required. This will be particularly challenging for consumers who have adjusted their household budgets without including these payments, let alone potentially higher monthly installments that may now be required.
While Government will likely take a hand in directing the pace of some collection activities, others will be determined by the debt holder. Collection agencies will likely be busier than ever as more debt holders assign debts to agencies. Agencies will face challenges when consumers owe from many different sources. There will only be so much money in the consumers wallet, and multiple collectors may be competing for the limited money in the consumers wallet. Agencies with advanced analytics and strategies will likely reach consumers first, and be more successful.
2. Continued economic uncertainty
As vaccinations are rolls out in 2021, the economy is expected to improve. Unemployment is also expected to decline, although it will still remain above the pre-pandemic historic lows. In this environment, Government agencies will likely continue to keep some curbs on the collection industry as the economy and consumers get back on their feet. While some consumers weren’t badly affected by the pandemic, many millions lost their job, or significant sources of income.
In 2021, we can expect Government protections to consumers will begin to end. And while the number of debts actively being collected will likely rise, the ability for consumers to pay those debts may not rise as fast. This means that collectors who can quickly pinpoint those who can pay will likely be most successful. An approach that treats all debts and debtors the same, will not be as successful because there will be a significant number of consumers who owe money and have no ability to repay their debt.
3. More digital communication
In 2020, the US Consumer Financial Protection Bureau (CFPB) issued two rules in late in 2020 that will significantly affect the debt collection industry when they go into effect in 2021. One in particular established rules around digital communication in the debt collection industry. This will hopefully lead to more digital communications (emails and SMS).
We know from our personal lives that more and more of our commercial communications occurs through digital communications. Consumers have come to expect that they can initiate and complete transactions from their phone, whenever they want 24/7. The good news for the industry is this can reduce the cost of collections, increase the speed of collections while also providing a better customer experience.
Consumers have begun to expect that they will now be able to control the channel used for their communications. They want to select their channel of choice, and be able to make contact quickly, efficiently, and securely. While the new CFPB rules establish best practices for digital communications, they do not provide full clarity, as the industry likely hoped. It will be interesting to see if the CFPB uses its new Advisory Opinion program to provide additional clarifications prior to these rules going into effect in November 2021.
4. Student Loan Challenges
In December, the Federal Government extended the Student Loan Forbearance Period through January 31, 2021. This means that student loan borrowers do not have to make any payments during this period. It is a safe assumption that this period will be extended by the next administration during their first two weeks in office. It is hard to imagine that a new administration will want one of its first acts to be the resumption of Student Loan collections.
There are over 40 Million Americans who have an outstanding student loan, with over $1.7 Trillion owed. What will occur in 2021 is anyone’s guess. There have been proposals to cancel $10,000 of debt for each borrower for example. Most of these proposals would need to be passed by Congress. Given how closely divided both houses of congress will remain, getting anything passed, let alone something potentially so controversial is suspect at best.
That said, at some point next year one would expect Student Loan collections will resume. The Department of Education will need to determine which agencies and approach they will be use, and how collections will be phase in.
The challenge for borrowers will be budgeting their family finances. With borrowers now having almost one year without having to make student loan payment, many will struggle to reintegrate that monthly payment into their family budget.