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Stressed out by distressed assets?

Brian W. Tuite //September 1, 2010//

Stressed out by distressed assets?

Brian W. Tuite //September 1, 2010//

With rising credit defaults and the economy making only fits and starts toward a recovery, companies that extend consumer and commercial credit are facing a growing pile of distressed assets and uncertainty over how to shrink it.

Charged-off consumer receivables, for example, remain at historically high levels as banks and credit-card companies charge off their non-performing accounts and loans.

In response to these mounting charge-offs, most companies muster their own resources to write letters and make calls to account holders, which drains resources, time, and, inevitably, much of the return on the distressed assets. And when these internal efforts fail, some companies turn to an outside collection agency for assistance, which can prolong the recovery process and introduce additional uncertainties in the protection of a company’s brand as debt is recovered.

There is, however, another option: sell the distressed assets outright to a debt-buying partner.

Benefits Of Selling Debt

The sale of distressed assets benefits companies in numerous ways. It can:

– Bolster the bottom line with an immediate cash infusion from the sale of the debt.
– Reduce the staff resources needed to track and pursue the charged-off accounts.
– Lessen or eliminate the need for a third-party collection agency.
– Protect a corporate reputation from getting damaged in the process of chasing customers for repayment.
– (For financial institutions) free up regulatory capital that needs to be held against the debt.

Debt-Buying Industry At A Glance

In the United States, there are an estimated 1,000 debt-purchasing participants, according to published industry reports. The largest of these typically purchase accounts on a national basis and have their own collection operations, which they may supplement with contingency collection agencies and collection law firms. Other debt purchasers may outsource collection tasks.

Different debt buyers typically focus on various stages of delinquent or charged-off accounts – those bad debts companies and financial institutions “charge off” as a business expense. Even though these accounts are written off at the end of the tax year, they are still legally collectable.

Currently, credit-card debt comprises about 70 percent of the accounts sold to debt buyers. The remainder is made up mostly of automobile loans, telecommunications debts, retail accounts, personal loans, utility bills, medical bills, and primary and secondary mortgages.

Awareness Of Debt-Selling Option On The Rise

With such benefits, more companies aren’t becoming aware of the debt-selling option.

The top 10 credit-card issuers, for example, as well as some super-regional and regional banks, regularly sell their charged-off assets.

Even so, the vast majority of regional and community banking institutions and other non-bank companies have yet to thoroughly explore the debt-selling tool.

Of those that have heard of it, some assume that selling their distressed debt will be an overly challenging or distracting activity, so they don’t look any further.

With a reputable and well-capitalized debt-buying partner, however, the process need not be daunting.

A Debt Buyer’s Role

In fact, it is the debt buyer’s core business to analyze the value of a debt portfolio, purchase the debt, and revive the dormant accounts through proprietary technology, specially trained staff, and a network of legal partners.

Because a debt buyer owns the accounts outright, it also has a strong incentive to work with account holders over a longer time horizon – up to six years – to identify solutions for repayment and recovery of the assets.

The top debt-buying firms also can demonstrate their success at protecting client reputations through ethical and sensitive treatment of customers.

Alleviate Distressed Assets To Stay Focused On Core Business

With rising awareness of the benefits of selling their distressed assets, more chief risk officers, lending managers and management teams are likely to consider partnering with a debt buyer alongside other tried-and-true accounts-receivable approaches.

In doing so, they are able to significantly reduce the stress of distressed assets, which means more time and resources to spend on the core business needs that matter most.
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