Non-judicial debt collection

2.7 The non-judicial debt recovery process is sometimes referred to as the pre-action stage or the informal collection stage. In one study[23], the following observations were made on extra-judicial debt recovery:

“The vast majority of outstanding debts are collected by the efforts of the creditor himself or his agent without the commencement of an action against the debtor. The principal reason is economic; debt collection by one’s own collection department or by a collection agency is likely to be much cheaper than debt collection by a lawyer. The creditor may steer away from legal action for other reasons, including a desire to keep the debtor as a potential customer, but the cost factor is probably the most important reason for using some form of extra-judicial collection method in preference to an expensive lawsuit.”[24]

2.8 The Creditors Survey[25] compiled by the Central Research Unit (“the C.R.U. Creditors Survey”) of the Scottish Office yielded similar findings:

“When default in payment of a debt occurs, the creditor usually pursues its recovery by means of ‘informal’ techniques such as reminders or letters threatening legal proceedings. In the early stages, the creditor normally has an interest in retaining the debtor as a customer and will usually be anxious not to dissipate goodwill, at least until more information becomes available on the nature of the default and the debtor’s intentions or ability to pay.”[26]

2.9 The same survey further found that the scale of default which required some form of pursuit varied from one in four of all accounts to one in ten. After creditors have exhausted their own informal recovery procedures, about three-quarters of them passed over the details of the debt to a debt collection agency or a solicitor. Debt collection agencies usually write further letters and may visit the debtor before deciding whether a court action is worthwhile.[27]

2.10 Further, according to the C.R.U. Creditors Survey:

“All creditors said that while their aim was to secure as quick and inexpensive settlement as possible, they wish to retain customers, and they are sympathetic to debtors’ genuine problems, such as bereavement, illness and unemployment. All creditor organisations stressed how difficult it is for them to know the debtor’s circumstances, and that the initiative lies with the debtor to inform the creditor of the reasons for default. All creditors said they were prepared to agree to alternative payment arrangements if the debtor was unable to pay at once.”[28]

2.11 The same view was echoed in a Canadian study that stated:

“Creditors and collectors uniformly say that they are anxious to discover why the debt is not being paid, and if the reason is misfortune or some defence to the claim, this information will be taken into account.”[29]

2.12 Although empirical data was not available, the C.R.U. Creditors Survey found that informal recovery procedures resulted in satisfactory arrangements for payment in the great majority of default debts, and estimated that in many organisations the proportion of default debt cases reaching the court stage was less than 1%.[30]

2.13 These studies indicate that the extra-judicial debt collection process is beneficial to society at large. Debts are repaid more speedily without immediate recourse to the judicial system. Considerable public resources can be freed for other uses. In the following paragraphs we examine the factors which contribute to the occurrence of abuse.

What causes abusive debt collection?

2.14 Factors which contribute to improper debt collection practices include -

The nature of the debt collection process

2.15 Debt recovery or collection involves the exerting of pressure on the debtor. A debt-collection agency is likely to adopt more aggressive tactics than the creditor because the collection agency is often retained only after the creditor has made substantial efforts to collect the debt itself. Collection agencies usually charge their clients on a “no collect, no pay” contingency basis. In the event that a debt is successfully collected, the collection agency will retain a percentage of the amount. The percentage may range from 10% to 60%,[31] depending on the amount recovered, the age of the account, and the value of the business between the agency and the client. Since collection agencies charge clients on a contingency basis, individual debt collectors are usually paid a small salary plus commissions or bonuses. An individual debt collector’s monthly remuneration, as well as the agency’s earnings, therefore, largely depends on the ability to pressure debtors into effecting repayment after debtors have neglected or refused to pay creditors directly.

The lack of professionalism among some debt collectors

2.16 Whilst operators at the top-end of the debt collection industry may be reasonably well qualified and experienced, surveys indicate there is often a lack of professionalism among debt collection agencies. In Alberta, for instance, where debt collectors are required to be licensed, there is no educational requirement to become a debt collector.[32] The Institute of Law Research and Reform of Edmonton, Alberta, found that collectors in general have no more than a grade 12 education,[33] and complaints have been received about the absence of training for would-be collectors.

2.17 We are not aware of any formal survey conducted in Hong Kong on the educational level of debt collectors, but a newspaper article[34] found that debt collectors come from all walks of life. The background of three debt collectors was considered:

Case No. 1

This debt collector graduated from a Canadian University with a degree in economics in 1997. He was introduced by a friend to a debt collection agency and became a debt collector because he had difficulty finding other jobs. Since he had only six months’ experience in the debt collection business, he was responsible only for collecting small debts. His clients were mainly credit card companies, mobile phone companies and money-lenders. He had a basic salary of five thousand dollars, and would get a commission of three to four per cent of any recovered debt. The amount of commission he received would not exceed one thousand dollars a month on average. His collection method was to phone up the debtors constantly to annoy them, and to use foul language to intimidate them. He claimed he had never employed illegal tactics.

Case No. 2

This debt collector was a Form 5 graduate, and, like the collector in Case No. 1, was introduced by a friend to a debt collection agency because he was unable to find other employment. He had been a debt collector for three years and his average earnings did not exceed seven thousand dollars a month. Although he was eligible for a commission of five to six per cent of the recovered debt, he mentioned that the rate of successful recovery was less than ten per cent given the economic downturn. He admitted he had occasionally resorted to illegal tactics to recover debts. His usual collection tactic was to pay personal visits to the debtors together with two other colleagues.

Case No. 3

This collector has been in the business for ten years and claimed to be a senior member of the debt collection agency. He had a basic salary of eight thousand dollars and a commission of six to eight per cent of the recovered debt. His average monthly earnings amounted to around twenty thousand dollars. He had many ways of obtaining the contact details of debtors, such as bribing the staff of some telephone companies, pager companies and even some government departments. Other sources of information include the Marriage Registry, Companies Registry and car-dealers. This collector usually paid personal visits to the debtors and claimed a success rate of between 10 per cent to 20 per cent. He admitted he had used illegal tactics, and he claimed that debtors were usually reluctant to report them to the police.

Loose-lending

2.18 There is a view that part of the reason for defaults in repayment lies in the availability of easy credit.[35] Certain financial institutions are willing to accept high risks in return for the high profit margin of credit cards and the personal loan business. Some creditors do not exercise sufficient care to ascertain the financial standing of applicants before granting loans or other credit. An aggressive provider of credit is a danger, not only to the debtor, but also to the debtor’s other creditors whose loans or other credit may have been responsibly granted.

Economic downturn

2.19 A major cause of the increase in repayment defaults is the economic downturn, which has resulted in users of consumer credit who were credit-worthy at the time the credit was granted becoming unemployed or suffering pay-cuts. For example, the Australian Law Reform Commission in its Report on Debt Recovery and Insolvency[36] found that the most important cause of non-business debt default was an unexpected change in economic circumstances.

The judicial process in debt recovery

2.20 At the beginning of this chapter, we mentioned that the stages of debt collection are inter-related in that the effectiveness of the later stages of debt collection have a bearing on that of the preliminary stage; and, similarly, if the preliminary stage is ineffective, more cases will proceed to the later stages. Although the efficiency of the judicial process for recovering debts is outside this Report’s terms of reference, it is briefly discussed in Chapter 10 of this Report.

Other factors

2.21 We have set out above some factors that contribute towards the occurrence of defaults and may lead to abusive debt collection. Other factors, such as whether or not there are sufficient legal deterrents against abusive debt collection, are examined in Chapters 3 – 6 in this Report.

[21] Scottish Law Commission, Report on Diligence and Debtor Protection (1985) at page 9.
[22] Scottish Law Commission, cited above, at page 11.
[23] Institute of Law Research and Reform of Edmonton, Alberta, Debt Collection Practices (Report No 42 June 1984).
[24] As above, at paragraph 2.1.
[25] Report No. 8, Central Research Unit Papers (1981).
[26] Scottish Law Commission, Report on Diligence and Debtor Protection (1985) at paragraph 2.16.
[27] As above.
[28] As above.
[29] Institute of Law Research and Reform of Edmonton, Alberta, cited above, at paragraph 6.28.
[30] Scottish Law Commission, cited above, at paragraph 2.17.
[31] Institute of Law Research and Reform of Edmonton, Alberta, cited above, at paragraph 2.9.
[32] As above, at paragraph 2.7.
[33] As above, at paragraph 2.10. The equivalent of Grade 12 in Hong Kong is Form 6.
[34] Ming Pao Daily News, 19 April 1998 at page F2.
[35] In fact, it has been commented that the most effective debt recovery is the maintenance of good credit control. J Richardson, Debt Recovery in Europe, at page 150.
[36] Australian Law Reform Commission, Report No. 36, at paragraph 21.