InsideARM Debt Settlement Survey

How Creditors and Collectors Utilize the Debt Settlement Industry to Increase Collections

October 2011

Brought to you by with reporting findings sponsored by

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Comments and Observations

Historically, the debt settlement industry has en-joyed a less than stellar reputation in the eyes of most ARM professionals. Many companies were perceived as preying on consumers by charging large upfront fees and delivering little or no results for the consumer.

As is generally the case, the bad actors are the ones that cast the brightest light over the entire industry; the ARM industry is certainly no stranger to this phe-nomenon. It was for this reason we designed this survey to better understand exactly how the ARM industry views the debt settlement industry today, and more importantly, what role the debt settlement industry can play in increasing liquidations for credi-tors and collectors across the accounts receivable management lifecycle.

With 649 ARM professionals responding to this survey, one thing that was immediately apparent is that debt settlement is on the radar of ARM profes-sionals. With roughly half of the survey participants indicating that they currently work with the debt settlement industry today, we are seeing the begin-ning of a clear trend developing towards acceptance of this channel and the adoption of its use to in-crease liquidations.

Agencies are clearly leading the way in the para-digm. Collection agencies outnumbered debt buyers 3:1 and legal recovery firms 4:1 in working with the debt settlement industry. Understandably so, creditors still rank among the lowest in terms of firms utilizing this channel today, but insideARM.com believes even this group is showing signs of early adoption around this asset class.

It appears from the results of the survey, as well as the numerous comments provided by respondents, that the concerns about reputational credibility of the industry and the past practices by bad actors

(now legislated in a manner designed to strictly mitigate future offenses) has taken a back seat to liquidation performance and concerns around data security, privacy, compliance, and the FDCPA. The top three reasons provided for not working with the debt settlement industry related to these issues while concerns around reputation came in fourth, with only 13% of participants stating reputation as a concern.

One of the most telling pieces of data to come out of the survey centered on a proposed solution to many of the top concerns noted by the survey participants. When respondents were asked if they would reconsider their decision to work with debt settlement companies if provided a secure, compli-ant, aggregated data repository of debt settlement accounts, nearly half said they would change their decision to work with the industry, further demon-strating that security, compliance, and scalability in leveraging the debt settlement industry all were more important than the perceived reputation of the industry as a whole.

insideARM.com wanted to further discover not only which companies or segments of our industry most utilize the debt settlement industry, but how ARM firms are utilizing this new channel to increase liquidations. When asked if the participant’s firm had deployed a focused strategy to utilize debt settlement companies, 48% of ARM firms indicated they had deployed a focused strategy around debt settlement companies. Furthermore, 44% of these firms indicated that they had implemented a dedi-cated team or workgroup to focus solely on this segment of the account population. Of the 52% of respondents who indicated they worked with the debt settlement companies but had NOT deployed a focused strategy, 75% let collectors on the floor work accounts at will in accordance with the exist-ing settlement authority in place.

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While it was interesting to see such a large percent-age of companies that currently work with the debt settlement industry today, it was apparent that the ARM industry is not fully exploiting the opportuni-ties provided by this new channel. Over half of the survey participants that currently work with the debt settlement industry work with 10 or fewer debt settlement companies; and fully 75% of those utiliz-ing this channel work with fewer than 20 companies. Even with some attrition and consolidation as a result of the new regulations placed on the industry last year, there are still hundreds of debt settlement companies operating in this newly regulated envi-ronment. Locating and managing hundreds of debt settlement companies, however, appears to be a major barrier to firms already resource-constrained in a profit-conscious downward business cycle.

When asked about the methodologies and practices ARM firms utilize to communicate with and share data with debt settlement companies, over 71% relied solely on the use of inbound and outbound telephone calls directly with debt settlement compa-nies. Clearly, this practice would be identified as the most inefficient channel to manage large volumes of settlements, yet it appears to be the preferred and most widely accepted methodology in practice today. In the comments provided by numerous participants, one of the chief complaints was the inefficiencies this channel provided and the costly, time-consuming manner in which debt settlement companies operate, resulting in wasted time and frustration for collectors.

What really matters most to ARM professionals is account liquidation performance. In general, the survey results indicate that debt settlement ac-counts perform well; and, based on some metrics, quite better than typical mixed-bag consumer card accounts. Roughly a third of respondents indicated that they settle accounts with debt settlement com-panies at a rate of 46% and higher. A similar percent-age of survey participants indicated that the monthly

conversion rate on a portfolio of debt settlement accounts was in the range of 1-10%. Probably the most telling metric related to performance came in the data surrounding broken payment terms. The highest percentage of respondents at 16% indicates that they saw 0% broken settlements while 28% saw a break rate of between 1 and 10%, still well lower than typical industry averages. This indicates that while debtors enrolled in debt settlement programs may be some of the most difficult individuals to en-gage in the collections process, once the consumer is engaged and actively paying toward a term settle-ment, the break rates on these settlements appear to be much lower than overall industry averages.

As with most practices in the ARM industry today, process automation, scalability and security/compli-ance issues are direct drivers to productivity and ul-timately profitability. In down business cycles where budgets are strained and resources scarce, these things matter even more. The ARM industry has always been keenly focused on developing more pro-ductive technologies, techniques and practices in an effort to continually improve productivity and exploit new channels to serve their clients more effectively. It appears from the results of this survey that the industry is once again shifting in a manner designed to deliver more previously unexplored channels. Those firms that can recognize the shift earlier on and quickly move to deploy proven, focused strate-gies and leading edge technologies to leverage this newfound channel will be in a position to reap the highest returns for their investments.

The Survey and Its Results

insideARM.com designed its Debt Settlement Survey to gain insight into the perception and utilization of the debt settlement industry by creditors, buyers, collectors, and legal recovery firms. Recent legisla-tion may have changed the perception of the indus-try, and we wanted to better understand the extent

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to which creditors and collectors now utilize this channel to manage collections and recoveries.

The survey, conducted over a two week period in October of 2011, generated a good deal of re-sponse. We partnered with Persolvo Data Systems

How Would You Classify Your Primary Business Industry?

Industry Responses Percent

Collection Agency 345 53%

Debt Buyer 71 11%

Legal Recovery Firm 55 8%

Credit Card Issuer 36 6%

Other 142 22%

on sponsorship of the survey; they also provided an Apple iPad2 as a prize award for participation.

Over the two week period the survey was available on InsideARM.com, 649 respondents completed the survey. The results of the survey and an analysis of the data are provided below.

What is Your Title in the Organization?

Title Responses Percent

Supervisor/Manager 138 21%

Director 112 17%

CEO/CFO/ C-level executive

110 17%

EVP/SVP/VP 76 12%

Attorney 46 7%

Coordinator/Rep/ Specialist

31 5%

Analyst 24 4%

Consultant 23 3%

Administrative 17 3%

Other 72 11%

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Does Your Company Work With Debt Settlement Companies to Settle Consumer Debt?

Answer Responses Percent

Yes 342 53%

No 266 41%

Not Sure 41 6%

Respondents Who Currently Work with Debt Settlement Companies - by Industry

Industry Responses Percent

Collection Agencies 182 53%

Debt Buyers 47 14%

Legal Recovery Firms 40 12%

Card Issuers 18 5%

Other 55 16%

The largest group of respondents identified their primary business classification as Collection Agency. Collection Agencies made up over half of all respon-dents, or 53%. Collection agencies also made up over half of all companies who currently work with debt settlement agencies to settle accounts.

Debt Buyers were the second largest responders, accounting for 71 companies or 11%. Debt buyers were also 14% of all companies who currently work with debt settlement agencies.

Conversely, Credit Card Issuers made up the smallest group of respondents to the survey overall, and to those answering YES to working with debt settlement companies. Overall 6% of respondents identified themselves as a Credit Card Issuer, and only 5% of Credit Card Issuers answered YES to working with debt settlement com-panies to settle debts.

This illustrates the clear dichotomy between first-party and third-party businesses: whereas 79% of respon-dents making up collections agencies, debt buyers, and legal recovery firms currently leverage debt settle-

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ment companies as a collection channel; first-party Credit Card Issuers made up only 5% of respondents actively working with debt settlement companies to collect debts through this channel.

In conclusion, Collection Agencies, Debt Buyers and Legal Recovery Firms appear to be the early adopters of a strategy shift to leverage the debt settlement Industry as an alternative collections channel, while Credit Card Issuers appear to be willing to surrender these accounts to third-party collectors downstream due to a lack of willingness to work directly with the industry at this point.

Respondents Who Do Not Currently Work with Debt Settlement Companies

While over 53% of respondents to the survey affirmed they were currently working with debt settlement com-panies to collect consumer debt, 41% of survey participants answered NO to this question. Those companies that answered NO identified themselves in the following industry classifications. (Note: Respondents identify-ing themselves as OTHER were primarily service providers to the industry or not directly involved in the collec-tion of consumer debt.)

Industry Responses Percent

Collection Agency 142 53%

Credit Card Issuer 17 7%

Legal Recovery Firm 15 6%

Debt Buyer 14 5%

Other 78 29%

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Reasons Provided for not Working with Debt Settlement Companies

When asked to provide the reason or reasons why they did not currently work with debt settlement compa-nies, respondents gave the following justifications.

Reason Percent

Settlement Percentages too low 16%

Legal concerns about dealing with third parties 15%

Security/Compliance Concerns 14%

Industry Perceived as not reputable 13%

Prohibited by agency agreement with creditor 10%

Limited resources to dedicate to this channel 8%

Break rates too high 5%

Too hard to locate and manage multiple debt settlement providers

5%

Not enough knowledge of the industry to make this channel effective

4%

Other 10%

The top three reasons given for not working with the debt settlement industry are related to the economics of the settlements derived through this channel, as well as the specific security, compliance, and legal concerns regarding sharing data with debt settlement companies. Given the largest group of companies that answered NO to working with the industry were collections agencies, who many times work on contingency agreements with thin margins, this would seem logical.

Ironically, reputational credibility of the industry registered only the fourth highest out of nine possible rea-sons provided, indicating that collectors and creditors may now be warming up to the idea of a regulated debt settlement industry.

The last group of reasons provided primarily dealt with a lack of understanding of the industry as a whole, and inability to effectively locate and manage a large group of debt settlement companies or a specific lack of inter-nal resources in order to effectively develop a strategy or manage a strategy in order to leverage this industry as an effective collections channel.

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If You Are Not Working with Debt Settlement Companies, What Strategy Do You Use MOST When You Identify a Consumer in a Debt Settlement Program?

Strategy Percent

Specialized In-House Collections 42%

Contingency Placement 18%

Legal Recovery/Legal Network 14%

Dunning Notices Only 8%

Other 18%

It was interesting to note that the companies who said they did not work directly with debt settlement compa-nies did in fact have some type of strategy established in order to focus on accounts identified as belonging to this channel. Over 42% of survey respondents had developed some type of specialized in-house collections strategy to work debt settlement accounts separately from their other accounts while approximately 18%, issuers or debt buyers presumably, would employ a strategy of con-tingency placement for collection, and only 14% said they would employ a legal recovery strategy.

Validating the Reasons for Not Working with Debt Settlement Companies

The next question in the survey was designed to confirm any number of reasons given for not working with debt settlement companies, ranging from data security to legal compliance around FDCPA to a lack of centralization.

If Provided a PCI Certified, Centralized Data Repository to Locate Collection Accounts Enrolled with Debt Settlement Companies, Would You Reconsider Your Strategy?

Answer Percent

Yes 49%

No 51%

That 49% of respondents said they would recon-sider their decision to settle debts directly with debt settlement companies seems significant. Clearly, the idea that debt settlement companies are not repu-table is no longer an opinion shared by the majority. To the contrary, the desire to efficiently settle debts through a centralized portal that provides industry-standard data security and compliance was the main reason over half of all companies currently NOT working with the industry today would reconsider their deci-sion to directly settle debts with debt settlement companies through this type of secure data repository.

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How Companies are Currently Working with the Debt Settlement Industry and What Results are These Companies Recognizing?

But what about those companies that responded YES to working with debt settlement companies? insideARM.com wanted to better understand which ARM business entities worked with the industry and what types of results companies typically see when collecting debt via this channel.

We asked respondents to share information regarding their strategies, settlement percentages, liquidation rates, and break rates on term settlements.

Does Your Company Have a Dedicated Strategy Focused Around Debt Settlement Companies?

Answer Percent

Yes 48%

No 52%

Does Your Company Have a Dedicated Team or Department That Works Debt Settlement Accounts?

Answer Percent

Yes 44%

No 56%

If NO, Does Your Company Allow Individual Collectors to Work Directly With Debt Settlement Companies?

Answer Percent

Yes 75%

No 25%

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When asked about a focused strategy related to debt settlement accounts, surprisingly, roughly half of the respondents replied that they had developed a focused strategy around the use of this channel for collections. This demonstrates an acceptance of working with this industry and the adoption of a relatively new channel to improve collections operations and performance.

When asked if companies had deployed special departments or teams as part of their overall debt settlement strategy, again, roughly half replied that they had developed a strategy that relied on a dedicated team of individuals to handle these types of accounts. This demonstrates that while companies are not only looking to the debt settlement industry as a new source for liquidation improvements, they are recognizing the need to deploy strict policies and strategies in order to maximize the potential recoveries from this new channel and to remain in compliance when dealing with third parties in the collections process.

Of the 56% of respondents that answered NO to having a dedicated team to work debt settlement accounts, three-quarters of those same respondents replied that they allowed their collectors to work individually and directly with debt settlement companies. Absent a focused and dedicated strategy to work debt settlement accounts both effectively and to remain in compliance while doing so, collections managers would be advised to closely monitor the practices of individual collectors when working directly with debt settlement companies to ensure the organization is communicating and sharing data with these companies in a manner that is consis-tent with current law.

Understanding How the ARM Industry is Working with Debt Settlement Companies and the Performance Metrics Related to Settlements Via this Channel

The following section of the debt settlement survey focused on the number of individual debt settlement compa-nies that creditors and collectors are typically working with, as well as the channels of communications that are used to share data and settle accounts. Additionally, insideARM.com asked respondents to share their specific performance results in a number of areas to measure the overall effectiveness of settling these types of accounts.

How Many Debt Settlement Companies Does Your Firm Regularly Work With to Settle Debts?

Number of Companies Percent

0 4%

1-10 51%

11-20 20%

21-30 9%

31-50 6%

51-100 4%

101-150 2%

151-200 >1%

More than 200 5%

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At its peak, the debt settlement industry was made up of more than 2,000 companies. Today, in a post-reg-ulated debt settlement industry, there are still well over 1,000 companies providing debt settlement services to consumers. In order to gauge the density to which the ARM industry is effectively engaging this industry to assist in collections, we asked respondents to identify how many companies they regularly work with in order to settle accounts.

What is the Primary Method Used to Communicate and Exchange Data with Debt Settlement Companies?

Method Percent

Telephone 50%

Inbound Communications From Debt Settlement Companies/Negotiators

21%

Email Spreadsheets/Account Lists 15%

FTP Spreadsheets/Account Lists 11%

Other 3%

While 53% of all survey participants stated that they worked with debt settlement companies, and of those, 48% indicated that they had deployed a dedicated strategy around this asset class, it was interesting to note that over 71% of the respondents had not deployed a more automated or scalable solution to communicate and share data with debt settlement companies.

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Performance Metrics Utilizing Debt Settlement Companies as a Collections Channel

The next section of the survey focused on the actual results creditors and collectors shared about their settle-ment rates, liquidation rates, and break rates on term settlements. Survey participants were asked to share the typical settlement rate they track on debt settlement accounts, the typical monthly conversion rate on a portfolio of debt settlement accounts and the break rates observed on term settlements.

What is the Typical Settlement Rate (%) You Track Using Debt Settlement Companies?

Settlement Rate Percent

over 50% 18%

0 % 13%

46-50% 13%

10-15% 10%

36-40% 10%

16-20% 8%

31-35% 7%

26-30% 7%

21-25% 6%

41-45% 6%

What is the Typical Monthly Conversion Rate You See on a Pool of Debt Settlement Accounts?

Conversion Rate Percent

1-5% 19%

6-10% 15%

0 15%

11-15% 15%

over 30% 13%

16-20% 12%

21-25% 8%

26-30% 3%

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What is the Typical Break Rate You See on Term Settlement Agreements on Debt Settlement Accounts?

Break Rate Percent

0 16%6-10% 15%over 30% 14%1-5% 13%11-15% 11%21-25% 11%16-20% 10%26-30% 8%

insideARM.com would like to thank Persolvo Data Systems for their generous sponsorship of the Debt Settle-ment Survey by providing an Apple iPad 2 as the prize giveaway for participation in this survey. Inside Arm would like to congratulate Darren Price of Security Credit Services LLC, the winner of the iPad Giveaway.

About Kaulkin MediaKaulkin Media is the most credible publisher of specialized news and in-formation for the accounts receivable management (or “debt collection”) industry. insideARM.com is the firm’s flagship website, with over 60,000 subscribers including collection agencies and law firms, debt buyers, creditors, suppliers of technology and services to these groups, regula-tors, industry investors, and many other interested parties.

Kaulkin Ginsberg, parent of Kaulkin Media, is the leading strategic advisor for the ARM industry. For ARM service providers, our value-add services focus on analysis, growth, and exit strategies. For credit grantors, our focus is on optimizing receivables management strategies. Kaulkin Infor-mation Systems creates secure and affordable workflow, document, and compliance management technologies.

About Persolvo Data SystemsEstablished in 2005, Persolvo Data Systems is the first patent-pending system to aggregate account information from debtors enrolled in debt settlement programs. Persolvo aggregates account information from over 400 debt settlement companies with over $5 billion of debt settlement account data available to creditors and collectors seeking to collect these accounts. Persolvo’s web-based settlement application allows creditors and collectors to locate debtors enrolled in debt settlement programs, analyze their account information to uncover highly-liquid settlement opportunities, and settle large numbers of accounts online with hundreds of debt settlement companies using Persolvo’s PCI Certified, web-based settlement application. The Persolvo system is the largest database of aggregated debt settlement accounts available today and provides the most accurate and up-to-date information, including trust account sav-ings balances, on debtors enrolled in debt settlement programs. For more information, visit our website at http://www.persolvodatasystems.com.

Persolvo: Latin Verb - to unloose, explain, expound/pay off a debt, pay.

Kaulkin Media6010 Executive Blvd., Suite 802 Rockville, MD 20852 www.kaulkin.com www.insideARM.com

Persolvo Data Systems Jeff Dickey EVP Sales and Marketing 713-828-5805 jdickey@Persolvo.com