Cornerstone vs. The ACA

The ARM Industry:

As many of you have heard, ACA International (your tax-exempt trade association) has decided that it is not in the best interest of the association or its members to allow an organization providing risk management services to advertise their products or services through ACA International or its affiliated organizations. While I understand that ACA Enterprises (the for-profit arm of ACA International) provides similar risk management products and services, I fail to understand how restricting competition could be in the best interest of either ACA International or its members. In fact, I would argue that the opposite is true.

Cornerstone Support has been committed to providing the most comprehensive risk management products and services in the collection industry for more than ten years. As part of that continued mission and as a direct response to a significant number of client requests, we established a program to provide commercial insurance including E&O insurance to the collection industry. I have found that in most cases there has been a disparity in the cost of the Travelers policy through the ACA program and the actual market rate for a comparable policy with a comparable carrier. In fact, we have saved clients as much as 25% over their prior year E&O premium.

In my opinion, the decision to prohibit Cornerstone Support (an organization that has built a reputation as the premier licensing service provider to the collection industry) from advertising products and services through ACA International commits a disservice to the association and its members. I believe it also establishes a dangerous precedent for vendor members of ACA International.

If you are concerned that ACA International has not acted in the best interest of its members, I encourage you to contact ACA International's Executive Committee with your concerns.

ACA International
4040 West 70th Street
Minneapolis, MN 55439
(952) 926-1624
rippentrop@acainternational.org

For more information or if you would like the assurance that you are not currently overpaying for E&O Insurance, email insurance@cornerstonesupport.com or call us at (770) 587-4595.

Kindest Regards,

Matt Pridemore
Vice President
Cornerstone Support, Inc.
Office: (770) 587-4595

We need Customer Service More than ever!

In these hard economic times, adding more customer service is more important than ever. Don’t believe that; let’s look at a couple of industries to make the point.

Let’s start with the airline industry. When was the last time you said, wow that was a great flying experience? Imagine getting to the airport, walking right up to the counter, stroll quickly through security and getting right on to your on time flight. The plane leaves on time and you arrive exactly when you are supposed to. Your luggage is even waiting for you on the carousal as you walk up to the baggage claim area. Sound like a dream, actually this happened last Thanksgiving flying on Southwest from Tucson to San Diego. That is the exception to the rule (isn’t Southwest just that?) As someone who travels a lot, I could list stories upon stories of “that trip from hell”. Let’s take my friends from United. I have gone from a 100k flyer there to at best, a Premier flyer, if I am lucky (or unlucky depending on how you look at it). Don’t expect to talk with an agent; if you need to make a reservation, you need to use the internet. If their system is having difficulties, good luck. Try and speak with someone (who has been outsourced to India) and it will cost you extra, not to mention trying to understand their accent. Come on, how many Georges are there in India? I am all for outsourcing, if it makes sense. But take your time, teach your outsourcers the ins and outs of your business to help them provide excellent customer service. Take the effort so that your outsourcer is completely comfortable with your service. How many times have you spoken with Dell for customer service only to be more frustrated than before you called. And the reason you called was because you computer was not working right. And please, let them use their real name.

Now we must deal with the mass cutting of flights, flying somewhere else to get where you are going, and the dramatic increase of flights expenses (should we blame the oil companies)? Since the airlines have decided that bankruptcy is a business plan, imagine the loyalty factor of their employees. You work for a company for 20 years and invest your retirement in your company, only to watch the value of your retirement dwindle to zero. Meanwhile the airline executives are walking away with massive golden parachutes. Starting pay for an airline pilot hovers around what fast food managers make, a comforting thought at 25,000 feet in the air. So as an employee you now love your company and coming to work everyday. Your hours have been increased, you have given up concessions to keep your job and now you have to deal with me, the consumer who is pissed off that your service has been degraded down to nothing. So already, we have entered the world of disgruntled employees and what do you think our experience will be?

Now the prices we are paying to fly are up and the service levels are down. Let’s throw in the “extra” charges. Luggage is now extra (delivered or not), food (if you call it that) is extra, beverages are extra, and don’t even think about changing your flight without at least a $100 change fee, what is next? I love the new Southwest commercials, pay toilets, pay tray tables, and pay recliners, where does it end? How about extra for delivery of your luggage? I would be willing to pay to have my luggage actually make it to my destination. Leg room, on United you can actually pay for leg space, pay extra by the inch. How about pay by the minute? Make it on time, pay full fare, for each late minute you get to deduct off your full fare. Now there is an incentive to get you there on time! And a reward if we are late, at least we get compensated. Talk about a recipe for putting the airlines out of business! Loyalty programs are great, but if you can never get your flights with blackout dates etc it becomes a dis-loyalty program. Even Southwest has changed their program to limited seats available, shame on them!

But enough bashing of the airlines, let’s look at another industry, the hospitality industry.

The hospitality industry has decided that their solution to these hard times is to fee their client back to profitability. Whoever invented the “resort fee” should be taken out and shot. You pay for your hotel room but it does not include the resort? You need to go directly to your room and do not pass go or collect $200. Do not think about using the gym because then you will get a gym fee. Drink the water in your room, $4.95 out the window, Internet another $12.95. Do not park your car at the hotel, even though there is ample space for all, fork out another $20 a night for your car to rest. Do not forget about the energy crisis additional fee. You could be green in your thoughts, that means use your sheets and towels again. No you do not get a discount for saving the hotel money for laundry costs and labor, but your do get to feel good about yourself. When a hotel starts giving us plush towels worth using twice then we will. You could order food at your hotel and pay $25 for a burger. Do not think about ordering a pizza to be delivered, Hotels are quick to ban pizza delivery companies from delivering to their rooms. Look at the lines of clients hanging out to pick up the pizza in the lobby or outside the front door. Here is a hint to the hospitality industry. If you price yourselves competitively there is no reason to go elsewhere. Mini fridges in hotel rooms are filling up with groceries so that you do not have a $300 lunch and bar bill for your 2 day stay. Breakfast buffets starting at $27.95 when Denny’s down the street is charging $6.95. Oh you cannot compare the two, the food is so much better at your hotel. Stop laughing a scrambled egg is a scrambled egg. If it were my business, charge $30 more a night and include it all, Imagine checking in and the rate of $279 actually was $279 a night. We bring our laptops with internet access, our cell phones to make calls, my gym membership across the street and now we bring our own food to avoid the astronomical prices being charged. Do not even get me started on trying to host a conference at a hotel, the rates you pay there, border on illegal.

So now I have ranted and raved about just two industries that have cut their customer service. There is so much more to talk about, retailers, manufactures, health care even education have all cut service levels. Our own industry, financial services is just as guilty on cutting customer service. Added fees, less services, more automation on just a few ways we have cut. At least we have moved to the 7 day a week 24 hours a day access. Internet banking has opened up the industry to give smaller firms the chance to compete with the big guys. And minus the American Bankers Association effort to stop Wal Mart, banking is close to a commodity service.

In our industry you see so many small businesses starting up, executives moving from corporations to start their own. These executives are fed up with corporate America and now trying to establish their own niche. What is the value? Adding customer service. An executive knows if you can take care of your client you can retain them. Access your rep when you need them. Solutions to your needs when you need them. All real issues that customer service can resolve. And not someone who answers the phone n a foreign country that cannot resolve your issue. Go back to the days when Fed Ex actually positively got your package there overnight. Nordstrom reps were waiting for you to make your purchase. The flight attendant was actually happy to see you.

Take it back America, add Customer service and loyalty will return. I know we would be loyal to someone who is loyal to us. Treat your clients with respect and service and they will buy from you. Spend your dollars on customer service and your clients are happy, thus your employees are happy and you have appositive cycle going. Not his negative fiasco we are creating now by cutting customer service. The problem could be answered by this simple scenario. Answer this question, who is your current phone company? Do they give you great service or would you switch for a cheaper rate? Take note and pay attention before you become another commodity. Do not rely on the cell phone industries response to customer service. Lock them into a two year deal and move onto the next client. You know you are safe for two years no matter how bad your customer service is. If they jump to another service, then the account goes delinquent and goes to collections. Wait lets think about this

Canceled debt can become a tax liability

Bills are piling up to the point where you dread opening your mailbox. If only your creditors would forgive your debt. Sometimes, they will -- but even then your money troubles might not disappear. Canceled debt in many cases is considered taxable income. And if a creditor forgives thousands of dollars of debt, you can find yourself whacked by a big tax bill. And that is not the only consequence. Forgiven debt can raise your income to the point where you're ineligible for certain credits and tax deductions, or part of your Social Security benefits is taxed, said Bob Scharin, a senior tax analyst with Thomson Tax & Accounting. Of course, having a creditor absolve you of debt can be a financial lifesaver. Still, a tax bill isn't what many expect when debt is being erased. "People definitely are initially shocked," said Robin McKinney, executive director of the Maryland Cash Campaign, which helps lower-income taxpayers file returns. McKinney said she sees many such cases of shock now with car loans. The cars are repossessed and the loan balances wiped out, yet consumers receive a form saying they owe taxes on thousands of dollars of forgiven debt. "Some people have even said, 'If I had known this was a consequence, maybe I would have tried harder to refinance the loan,' " she said. Credit-card bills are one of the most frequent types of forgiven debt -- and it is taxable.Scharin notes an instance in which a consumer owed $21,270 on his credit card in 2004. The issuer, MBNA America Bank, agreed to accept about $4,600 to settle the debt. But the consumer balked at paying taxes on the $16,670. He argued that the settlement was a retroactive lowering of his interest rate and that he had repaid the principal. A tax court recently ruled against him.Home-mortgage debt is another area where many are trying to negotiate relief. Given the rise of foreclosures, Congress granted a temporary tax break for those whose housing debt is wiped out. Under the new law, you won't have to pay taxes on up to $2 million of forgiven debt on a primary residence. Any debt wiped out on a second home is still subject to tax. If the bank forgives the home-equity loan you used to make substantial improvements to the house, that won't be taxed, either, Scharin said. But if that home-equity loan was taken out for other reasons -- say, to buy a car -- then the forgiven debt will be taxed. Again, this tax break is temporary. It applies to mortgage debt forgiven last year and through 2009. Students, too, can catch a break. Many student-loan forgiveness programs are available if borrowers work in particular fields, such as nursing or teaching, after graduation. This debt relief is not taxed, Scharin said. Steve Hannan, executive director of the Maryland Consumers Rights Coalition, said negotiating for debt relief "is a good move," but you must realize the tax consequences. He advises consumers to obtain any settlement in writing and find out if the creditor will notify credit-reporting agencies that the debt is forgiven. "It doesn't do any good if the debt has been forgiven but nobody knows about it," he said. Keep all documentation to prove the debt was forgiven, in case a debt collector in the future tries to collect it again, he said. While credit-card debt generally is taxed, it won't be taxed along with any other debt that is canceled in cases of bankruptcy or insolvency. As for documents, if you have $600 or more of canceled debt, you will receive a Cancellation of Debt form, or 1099-C, for tax purposes. (Even if the amount is less than $600, you are expected to report it as "other income" on your tax Form 1040.) The IRS wants you to pay taxes on a pay-as-you-go-basis, McKinney said. If it looks as if you will owe a chunk of taxes on forgiven debt, you should pay estimated taxes on the amount or risk being hit with a penalty later, she said. If you don't have the money to pay the tax bill, you'll have to set up a payment plan with the IRS, she said.

Private Collection, Public Loss

Christopher Brauchli

Boulder

May
11
2008

Private Collection, Public Loss

My civil neighbor, the tax-gatherer, is the very man I have to deal with, for it is, after all, with men and not with parchment that I quarrel,-and he has voluntarily chosen to be an agent of the government.
— Henry David Thoreau, Civil Disobedience

It was impossible to know how it would turn out. Of course, there were a few hints. But they were so subtle that only someone with a bit of brain would have picked up on the clues.

Turning delinquent taxpayers over to private collection firms that make contributions to politicians instead of letting the Internal Revenue Service attend to that mundane task seemed like a great idea. So great, in fact, that no one in the Bush Administration foresaw the disastrous outcome.

The idea got its start as a result of the American Jobs Creation Act of 2004. The purpose of the act was not simply to create jobs. It was to transfer to the private sector a number of jobs that had been performed by the public sector - an almost certain guarantee of success since conventional Republican wisdom is that whatever the public sector can do, the private sector can do even better. (That approach reached its zenith in Iraq where President Bush turned over lots of the work formerly done by U.S. troops to private contractors who, it was believed, could do it more efficiently and cheaply than U.S. government personnel.)

In 2005 the IRS began farming out delinquent tax collections to private collection agencies. Three debt collection agencies were initially used and two of them had special qualifications for the work. They had made significant financial contributions to politicians. Pioneer Credit Recovery came from the district of Rep. Thomas M. Reynolds of New York and one of the things that qualified it to be a debt collector for the federal government was that it had given congressional candidates and political action committees $117,450 since 1995. Mr. Reynolds received $16,250.

Linebarger Goggan Blair & Sampson of Austin, Texas and its employees and spouses gave political candidates and PACs of both parties more than $400,000 between 1995 and the time the program was started. After 2007 the firm was fired although the government isn’t saying why that is. It might have to do with the fact that the firm made a $2000 donation to the mayor of Mansfield, Texas a month after he was elected or it may have had to do with the vacation it paid for a contract officer in Chicago that got the firm fired from doing work for that city.

Mark Everson who was the commissioner of the IRS at the time outsourcing tax collection was put in place admitted that outsourcing tax collection is more expensive than keeping it in-house. He nonetheless supported the privatization of collection efforts claiming he could not get sufficient funding to permit him to hire more public sector tax collectors. Following that ill-fated decision Mr. Everson left the IRS to head up the Red Cross where he served only long enough to begin an affair with the member of his staff that resulted in his loss of the job.

According to a report in the Washington Post the private collections program has been a disappointment. The goal of the program was to collect $1 billion from deadbeats owing $25,000 or less. Instead, most of those folks have gotten a tax holiday. Instead of collecting $1 billion, the private debt collectors only collected $49 million. The cost of the program was $98 million suggesting, to the mathematically swift, that it produced a net loss of $49 million.

Commenting on the program in a statement on the floor of the Senate(pdf), Sen. Ben Cardin of Maryland observed that the IRS was losing at least $81 million a year by using private debt collection companies. That's according to Nina Olson, the National Taxpayer Advocate who told Congress that if the $7.65 million spent by the IRS to operate the program were spent instead on its automated collection system it would generate $153 million in revenue. Not everyone would agree with her.

Rep. Jim Ramstad is the ranking Republican on the Ways and Means Oversight Committee. He is unimpressed by the statistics furnished by Ms. Olson. He said the “real choice is whether we use private collection agencies or let these tax debts go uncollected. I hope we don’t take an enormous step backward in our efforts to close the tax gap by eliminating a program that’s working.” He didn’t say what part of the program is working. He’ll probably want to explain to Ms. Olson and Senator Cardin (and Sen. Byron Dorgan of North Dakota, another critic) the part that is working since they are apparently unaware of its successes. He may also want to explain it to his constituents.

Posted by Christopher Brauchli at 6:20 PM |

CREDIT CRUNCH: GOOD NEWS OR BAD?

RECENTLY, Flock Advisors spent several days in New York holding meetings with lenders and investors. Walking past the Bear Stearns building through the pouring rain, we couldn’t help but contemplate the effects of the credit crunch on the collections and debt buying industries. In the final analysis, we wondered, would the contraction of credit and the economic slowdown be good news or bad news for an industry already weakened by historically high prices?

Assuming that the slowdown and the current contraction is not deep and prolonged, Flock Advisors believes the current economic storms are good for the industry and will reignite industry growth, particularly in the world of debt buying, which has been frustratingly stagnant during the last few years due to stratospheric prices.

FIRST, THE BAD NEWS: A few large banks like Merrill and CIT are no longer financing consumer debt portfolios. Every lender we spoke with has become more cautious in the current environment. Some have decreased advance rates. Some have increased coupon rates. More want participation in the residuals.

NOW THE GOOD NEWS: All the lenders we know are very bullish about the future of the debt buying market. They all see prices falling 10% to 20% (or even more) to more conservative levels. Although liquidity is falling too, its decline is generally perceived to be slower than the price declines, thereby improving returns.

AN INDUSTRY LEADER COMMENTS: Former President of OSI Portfolio Services and current Principal at Briannaco Investments Stacey Schacter told Flock Advisors: “This is the time industry veterans have been waiting for. For those that have been patient with their capital will be rewarded with the ability to pick up a variety of assets at relatively good prices amid decreased competition. The type of shock that occurs during a recession or market turmoil is generally good for the industry unless the recessionary period is too long or unusually deep. At this point, while I don't see a quick recovery in the economy, prices should remain within a more sensible band, leading to increased profits.”

THE BOTTOM LINE: We believe that as long as there are no major bank failures or additional credit tightening, 2008 has makings of a good year for debt buyers. The convergence of price declines and flexible financing with a wider range of offerings spells opportunity and growth.

CAPITALIZE YOUR UNIQUE POSITION NOW: Timing has never been more important. If you want to leverage your debt buying investments, start shopping ... and have fun negotiating!

NOW FOR A LITTLE SELF PROMOTION: If you don’t have the resources or lender relationships to arrange financing yourself consider giving us a call to explore your options.

For additional information, please contact either Michael Flock or Don Hilbert at Flock Advisors: at 404-419-2247 or mflock@flockadvisors.com or dhilbert@flockadvisors.com.

Collection industry has duty to treat consumers equitably

Robert Markoff, president, National Association of Retail, Collection Attorneys (NARCA) - Washington

As a young man, the future President Abraham Lincoln suffered financial hardship. At least three judgments were entered against him for non-payment of debts. Lincoln paid the first judgment in installments. For the other debts, the sheriff sold a few of Lincoln's possessions, including his horse and saddle ("Colleges' debit-card deals draw scrutiny," Cover story, News, March 17).

Today's turbulent economy is leaving many people unable to pay their debts. Consumers are disturbed when they, like Honest Abe, fall behind. Knowing that one of this country's most highly regarded citizens faced and overcame serious financial problems can provide some perspective in hard times.

If there were no consequences for non-payment of one's obligations, the temptation would be for no one to pay his bills. Debt collection is an important part of our economy. All consumers would be penalized if businesses were unable to recoup losses resulting from bad debt. In 2005, $39.3 billion was repaid, saving the average American household $351 in reduced prices and greater purchasing power.

Nonetheless, just as consumers must act responsibly, so too must collection professionals. Members of the collection industry should never miss the opportunity to do the right thing in helping consumers meet their responsibilities.

The industry need only look back at one of its predecessors when considering its professional conduct. Within a year of the sheriff's sale of Lincoln's possessions, Lincoln became a lawyer whose main court practice involved debts. Honest Abe was a collection attorney.

Do Not Be Fooled Arbitration is an Inexpensive Option

By Mark Hutchins

Consumer lending contracts often contain arbitration agreements which provide that disputes arising under the contract can be taken to arbitration rather than court. Arbitration is a private process where claims are decided by arbitrators who are legal experts. One advantage of arbitration over court litigation is that parties receive the same legally binding outcome that they would have received in court, but they get to that outcome more quickly and less expensively than in court. Once the prevailing party obtains an arbitration award, the award can be “confirmed” into an enforceable judgment by trial courts in all states.

Arbitration has received increased media attention lately, as a national association of trial lawyers has named eliminating consumer arbitration as their top agenda item for 2008. As a part of this push, legislators have introduced federal and state bills that would curb or kill consumer arbitration. The most visible bill is the “Arbitration Fairness Act” (H.R. 3010, S. 1782) that was heard in Senate and House subcommittees in late 2007.

Unfortunately, much of the lobbying, public relations and advocacy that has driven these bills has contained fundamental inaccuracies about how consumer arbitration actually works. From my experience, arbitration is a much quicker and less expensive method of resolving collections disputes. Of course, these savings benefit not just lenders, collectors, and debt buyers, but they also benefit consumer borrowers in the form of better and less expensive consumer lending products.

Because of the trial lawyers’ push to ban consumer arbitration, it is especially important to recognize arbitration’s benefits and to educate others about it. I want to take the opportunity here to address a few of the most important points that have been subject to misinformation.

First, arbitration does not stack the deck against consumers. No one wants a system that is unfairly tilted in favor of one type of party over another, and courts reviewing arbitration awards would never allow it. The available data about arbitration outcomes clearly establishes that business and consumer parties win in arbitration at the same rate that they win in court. Even consumer advocacy groups seeking to ban arbitration have now conceded this point.

Second, arbitration is clearly less expensive than court, particularly in default cases. According to the National Arbitration Forum website, the arbitration filing fee for a $4,999 claim is only $70 where the opposing party does not file a response. For a $7,499 claim the arbitration filing fee is also only $70, and for a $25,000 claim the fees is only $120. All of these filing fees are lower than the corresponding fees to file a lawsuit in Texas and in California, for example (see chart below).

Debt	N.A.F.	Texas	California
$4,999	$70	$72	$95
$7,499	$70	$72	$120
$25,000	$120	$287	$280

Third, arbitration procedures are more efficient than court procedures in several important areas that magnify arbitration’s cost savings. For example, instead of hiring local counsel in each jurisdiction where litigation must be filed, arbitration claims can be filed from a central location against respondents in any U.S. jurisdiction. Also, arbitration proceedings can be conducted as “document hearings” that do not require in-person appearances. Finally, arbitration’s procedural rules apply nationwide, eliminating the need to comply with varying state and local procedures in each jurisdiction where a claim is filed.

Lastly, there are many advantages to be found in integrating arbitration into an organization’s collections procedures. The filing of an arbitration claim opens up “work with” opportunities that could potentially lead to settlement before the arbitration proceeds to its conclusion.

From my experience, arbitration’s lower fees and procedural conveniences combine to make arbitration a much less expensive option than court to resolve collections disputes. It is important to understand these facts so that we are not swayed by the anti-arbitration pundits who are presenting inaccurate information. Keep your eyes open for any anti-arbitration bills in your state, and stand ready to educate decision makers and others about arbitration.

Mark Hutchins is the Managing Owner for Catalina Consulting, a company he started to provide consulting services to the credit and collection industry upon leaving his position as Vice President of Business Development for Asset Acquisitions Group LLC. Prior to consulting, Mr. Hutchins worked for Asset Acceptance LLC from December 2001 through March 2007. He held several management positions in the Legal Department including Outsourcing, Arbitration, Collections, and Pre-Legal until he was promoted to Assistant Vice President – Legal in December 2003. In April, he was transferred to the Marketing Department as an Assistant Vice President – Marketing and Acquisitions. Prior to joining Asset Acceptance, Mr. Hutchins held varying positions of responsibility in the Credit and Collection area for Ford Motor Credit Company. Mr. Hutchins has a BA in Material Logistics and Marketing from Michigan State University, and a MBA in Management and Information Systems from Wayne State University. Mr. Hutchins has been in the collection industry since 1999.

Home Deport Ends ILC Bid: Victory for the Banking Industry?

Home Deport Ends ILC Bid: Victory for the Banking Industry?

By Aaron Halegua | bio

The American Banker reported (log in required) that Home Depot announced that it would end its bid to purchase a Utah industrial loan company (ILC). This comes just less than one year after Wal-Mart withdrew its bid to buy an ILC. These bids by companies such as Wal-Mart and Home Depot have been vehemently opposed by an aggressive banking lobby, which does not welcome the competition from commercial firms. For now at least, it seems that this lobby has won.

Congress has been trying to clarify the rules governing who can own an ILC charter, but no agreement has been reached. In the meantime, the FDIC has imposed a moratorium (twice) on evaluating ILC bids from commercial firms. The moratorium is scheduled to end next Thursday. If the Home Depot application was still pending, there would be some pressure on the FDIC to make decisions on the issue of who can own an ILC. Although there are still some bids pending, such as one from the Blackstone Group, Home Depot’s withdrawal removes much of the pressure.

Nonetheless, the banking industry will still continue to press for federal legislation that restricts commercial firms from owning FDIC-insured institutions. Chris Dodd, Chairman of the Senate Banking Committee, has promised to talk with ILC supporters and get legislation on this issue moving in 2008.

While Home Depot reports that its own internal business strategy explains its recent decision to withdraw, it's hard to believe that the unwelcoming regulatory and policy environment that its bid encountered was not a factor. If policymakers were serious about helping to create economic opportunities for lower- and middle-class Americans, some feel that more should be done to support efforts like Home Depot’s – which was planning to use its ILC to offer credit to consumers and businesses, particularly those construction companies owned by or employing immigrants and foreign-born nationals.

Why are mandatory arbitration clauses so prevalent in consumer credit card agreements?

Justinian Lane

Mandatory arbitration agreements have been getting a lot of attention lately, particularly because of the high rate of "wins" when a creditor is a plaintiff. This win rate has been placed as high as 95%. The "reform" movement is quick to suggest that the reason the win is artificially high because there are so many default judgments in credit card agreements. I agree with that hypothesis. The vast majority of debtors will simply not respond when sued or taken to arbitration. Generally, people who get 3-6 months behind in their bills do so because they don’t have enough money to pay their bills - let alone to hire an attorney to defend them for not paying their bills. But where I disagree with the "reform" crowd is why I believe mandatory arbitration clauses are so prevalent in credit card agreements.

The "reformers" suggest that credit card companies favor arbitration because it is (a) cheaper and easier than court proceedings, and (b) prevents "deadbeats" from driving up the cost of litigation. Note that the latter claim acknowledges that defendants can and do drive up the cost of litigation; reformers usually attribute such tactics to plaintiffs, when it’s actually plaintiffs who have the greatest incentive to move litigation along.

Credit card companies know that perhaps 90 out of 100 people aren’t going to respond to legal action. Knowing this, the credit card companies obviously have an incentive to use the cheapest legal method to collect the debt. That’s arbitration, right? Wrong.

The process of suing a debtor or taking a debtor to arbitration is so similar that there won’t be any difference in legal costs for the creditor. In either case, the creditor’s attorney will have to draft a 1-2 page complaint that alleges a few basic facts: That the debtor has an account with the creditor and that the debtor owes the creditor X amount of dollars. Any competent lawyer can draft such a complaint in 30 minutes. Any competent lawyer who does collection work routinely can draft such a complaint in 5 minutes - debt collection firms have automated software that can crank out complaints that quickly.

Once the complaint is drafted, the next step is to either file it with the court and serve it upon the debtor, or to initiate the case with the arbitration agency and serve it upon the debtor. The National Arbitration Forum is the largest arbitration company in the country, and is used by many, if not most major credit card companies.

Let’s compare the cost of taking a debtor to arbitration vs. taking a debtor to court in the two populous states of Texas and California. The table below indicates the cost of filing and serving a complaint requesting $4,999, $7,499, and $25,000 in an NAF arbitration proceeding, in a Texas court, and in a California court:

In California and Texas, it is much cheaper to commence an action in court as opposed to arbitration. I have been unable to find a comprehensive listing of court filing fees by state, but the handful of states I checked are in line with the pricing of these states. As the table shows, it can be over five times as expensive to take a debtor to arbitration than it does to take him or her to court. So just to initiate the legal action, the courts have a substantial cost advantage over the arbitration system.

Again, recall that evidence suggests over 90% of these actions result in a default judgment. It’s also not cheaper to obtain a default in arbitration than it is in court. In arbitration or in court, the procedure to get a default judgment is the same: File a motion requesting a default judgment. The motion in either forum will be a one or two page document that explains that the debtor failed to respond to the lawsuit/claim in the required amount of time. The motion will then ask the court or arbitrator to grant a default judgment. An arbitrator will generally grant a default judgment without the necessity of a hearing. Many judges will grant a default judgment without a hearing, but some won’t. If a judge does require a hearing, it will be very quick- 15 minutes or less. I’ve seen them done in as few as five. Even if it takes an attorney a full hour at $200 an hour to get through the hearing, getting a default judgment through arbitration is still more expensive than getting a default in court. Plus, it’s easier to enforce a default judgment from a court (levying bank accounts, etc.) than it is to enforce a default from an arbitrator. All of this evidence suggests that if you’re planning on winning a majority of your cases through default judgments, it’s smarter to go to court to do so. So why do creditors put in mandatory arbitration clauses that prevent them from taking debtors to court?

Because mandatory arbitration clauses prevent debtors from taking creditors to court. Credit card companies get sued routinely for violations of such acronyms as the Truth in Lending Act (TILA), Fair Credit Reporting Act (FCRA), Fair Debt Collection Practices Act (FDCPA), Deceptive Trade Practices Act (DTPA), and a variety of other state and federal laws. In addition, many of these lawsuits turn into class action lawsuits, which the "reformers" constantly argue are an affront to God. By placing mandatory arbitration clauses in their contracts, credit card companies get to eliminate those evil class action lawsuits before they’re even filed.

I was inspired to write this post because the "reform" movement has been making a false argument. They’ve been arguing that mandatory arbitration clauses are used because it’s so much cheaper to "go after deadbeats" in arbitration than it is to court. Therefore, mandatory arbitration clauses benefit consumers who do pay their bills because the cost savings is passed on to them. This is plainly false because it’s more expensive to "go after deadbeats" in arbitration than it is to use the court system.

* In Texas, the jurisdictional limit for the Justice of the Peace courts is $10,000. Thus, any suit for $10,000 or below can be brought in JP court, where filing fees are between $10 and $20, depending on the county. Sheriffs will personally serve a defendant for fees ranging from $50 to $70, depending upon the county. The figure of $72 assumes a filing fee of $17 and a service fee of $55. Depending upon the county, filing and service costs may differ by $10 or so. The filing fee in all County Courts of Law in Texas is $232, and the jurisdictional limit of those courts are $100,000. The $287 figure was derived by adding $55 for service of process to the $232 filing fee.

** In California the jurisdictional limit of small claims court is $7,500. Filing fees vary from county to county, but not by more than a few dollars. I used an average fee and estimates the service of process fee of $50.00, which seems to be the going rate in most major metropolitan areas of California. Sometimes this means using the Sheriff, other times it’s a third party process server. For more information on California court filing fees, visit http://www.courtinfo.ca.gov/selfhelp/lowcost/getready.htm#fees

NCO Group Enters Into Definitive Agreement to Acquire OSI

How does this affect the industry? Does this affect your business?

What do you think of the merger?

Subprime Market

Has the Subprime Market collapse effected your business? Are you changing any strategy in your business to compensate for the marketplace?

What do attorneys do with their old files?

A collection attorney asked this question of the industry. What do other attorneys do with their
old files

Bruce Holder

Bruce Holder passed away Saturday morning of a Heart Attack. Our best wishes go out to his family and his "other family" at MasterFiles. Bruce was one of the nicest guys in the industry. He always had a great story to tell and put a smile on your face. Services will be held at Restland Funeral Home, Greenville Ave. & Restland Road. Visitation Wednesday 2-21-07, 6:30-8:00 p.m. Funeral Service Thursday, 2/22/07, 10:00 a.m. at the funeral home. Bruce just celebrated his 48th birthday. He will be missed by everyone who knew him.

2007 Resolutions

What will you do differently in 2007?

JP Kelso

JP Kelso of PRS Assets was found dead at his home in Denver on Monday. His death is under investigation by the Denver police department. JP was well known through out the credit and collection industry. As a leader in the debt buying industry he helped shape the industry into what it is today. JP was always seen in public with a smile on his face and you always knew of his presence in the room. He made numerous contributions to many charities and to our industry. He will be missed by everyone who knew him. Our sincere condolences to his family and friends.

Negative Publicity

How do you handle all the negative publicity in our industry?

Bankruptcy Survey - Hype or Truth?

The NACBA Surveys 700 U.S. Bankruptcy Attorneys on Eve of October 17, 2006 Anniversary of Controversial Law Change; Over Nine Out of 10 Say Law Has 'Simply Increased the Costs of Bankruptcy,' With No Benefits. What are your thoughts on this?

Conference Season

There are lots of shows coming up, what are your plans on attending? Any favorites? Any thing you should avoid out there?
Let us know your thoughts.

IRS vs Legislators

What is your stance between the IRS outsourcing to private collection agencies and The House and Senate making noise to end the IRS's plan to outsource a portion of their collection accounts?

2006 Projections

As the economy slows down what is your projection for 2006 and beyond?

Local lawyers going after harassing debt collectors

What are some of the ways you are combating the negative images portrayed in the press?

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