Debt collector's bankruptcy boom casts focus on ledger sales
Source: The Financial Review
A massive split has emerged in the aggressiveness of bankruptcy tactics of ASX-listed debt collectors, raising questions about any impact on sales of outstanding ledgers to them.
Research conducted by financial counselling groups found Brisbane-based Collection House's subsidiary Lion Finance had filed 512 bankruptcy actions in the Federal Court in the past financial year. Its major rival, Sydney-based Credit Corp, filed none while smaller providers were often in the double or single figures.
Gerard Brody of the Consumer Action Law Centre: "The banks and lenders that sell debt need to take greater responsibility." Dominic Lorrimer
Collection House, which proclaims it acts ethically, defended its record in a statement on Tuesday. The company maintained it clearly differentiated between vulnerable customers and those who could pay but did not.
"Every effort is made to avoid legal action and it is considered the 'last resort', following numerous attempts and invitations for the customer to engage with us," Collection House managing director Anthony Rivas wrote.
"All our litigation activity is undertaken within the law and in many respects our policies exceed legal thresholds and requirements."
He was unavailable for a scheduled interview with The Australian Financial Review, and did not answer further questions. Collection House did not dispute the numbers in the research, released by Financial Counselling Australia, Financial Rights Legal Centre and the Consumer Action Law Centre.
Credit Corp chief executive Thomas Beregi confirmed his organisation had not initiated any bankruptcy proceedings.
"We think it's only an option really in very, very rare circumstances," he told the Financial Review.
The reasons for not pushing the button on bankruptcy included that it had "fairly severe personal ramifications for people", he said. That includes travel restrictions.
Another issue Mr Beregi highlighted was bankruptcy involved the appointment of a trustee, meaning Credit Corp lost control over subsequent expenses the trustee chalked up.
"They will [also] sometimes adopt methods that we think are inappropriate and we can't control that," he said. Credit Corp did not wish to be held accountable for such actions.
The Consumer Action Law Centre's Gerard Brody said an example of a debt collector initiating action inappropriately involved a mentally ill person who had an outstanding credit card bill of more than $5000. The person, who lived in a regional area, had not responded to the credit card provider or the subsequent debt collector, which Mr Brody attributed to their illness.
This led to legal bankruptcy action and the appointment of a trustee, resulting in the debt spiralling to more than $50,000, he said.
Mr Brody said bankruptcy could be a valid action but the threshold for initiating proceedings should rise from $5000 to $50,000.
"The banks and lenders that sell debt need to take greater responsibility," he said. "We would like to see the banks only using debt purchasers that use only ethical processes."
Debt collectors can earn commissions for reaping outstanding amounts on behalf of companies such as banks. They can also purchase the whole debt ledger for a discount price 20¢ in the dollar for example and aim to recoup more.
But sellers of ledgers can be sensitive to the reputational fallout of any impression that they are supporting overly tough practices.
Mr Beregi said one seller had previously asked about his company's use of bankruptcy proceedings, and some sellers might require notification if such an action was to be undertaken.
The level of bankruptcy litigation by Collection House puzzled industry sources. "We just don't know how you could find so many accounts," Mr Beregi said.
One potential factor is Collection House has its own legal division, raising questions about whether this would help boost the revenue line.
Mr Rivas started at Collection House in mid-2016, and was soon touting a harder line than his predecessor Matt Thomas, who was known in industry as coming from the soft school of debt collecting.
By 2017, Mr Rivas flagged a change to bankruptcy action, reducing the "account balance threshold to commence proceedings to reflect more appropriate and fair criteria".
The change "significantly increases the number of accounts that will be actioned" and "encourages customers to take obligations and contact seriously".
The research comes after Collection House worked to repair its image after a black eye suffered in 2006. That was when the company agreed to repay $660,000 to 504 customers after chasing old debt in recoveries sparking an inquiry from the Australian Competition and Consumer Commission.
The Credit and Investments Ombudsman in 2018 received 284 complaints about Collection House's Lion Finance, while Credit Corp companies accounted for more than 500.