Governments Aren't Collecting their Commercial Debt: Study

Debt collection professionals trying to convince government agencies that private agencies are better suited to collect unpaid fines and penalties have some new ammunition.

A new study published in the Yale Law & Policy Review details how government collection systems at all levels are failing to collect what is owed, giving more governments revenue to help balance their budgets and better serve their constituents. The report’s researchers recommend governments sell the debt or outsource it to private collection agencies, among other things.

But the biggest missed opportunities lie not with unemployed consumers who haven’t paid back taxes or unpaid parking fines.  The report found that billions are owed to federal, state, and local government agencies from corporations and businesses penalized for criminal or regulatory violations.

The U.S. Department Justice, for example, has collected less than 4 percent of the penalties it has imposed, the study found.  State and local governments aren’t doing much better.

“These findings have significant theoretical implications,” the researchers wrote. “They undermine the ‘assumption of collection’ underlying much of the discussion about administrative fines and penalties. They also challenge accepted notions about how administrative agencies understand their enforcement mission.”

The report, “The Collection Gap: Underenforcement of Corporate and White-Collar Fines and Penalties,” was researched and written by Martin H. Pritikin of Whittier Law School and Ezra Ross of the UCLA School of Law.

Bruce Cummings, CEO of government-focused collection agency Gila Corp., told insideARM that the number of government commercial bad debt accounts his firm has received more than doubled from 2009 to 2010. And based on the content of current 2011 portfolios, he expects the number of commercial accounts will double again this year.

“It’s everything – fines, fees, taxes, and utilities,” Cummings said, adding that the average balance of those accounts is about twice the size of consumer accounts.

Bad debt commercial accounts with government agencies are increasing partly because more businesses have filed for bankruptcy protection.  Those accounts may be harder to collect if some businesses have liquidated and not reopened as another entity.

But Cummings said he also believes that governments are finally starting to get that they are not experts at collecting debt and are missing opportunities to collect the debt owed them from companies that are still viable, have restructured, or reopened as new businesses.  The problem, Cummings said, is that many government agencies don’t have the resources to pursue outsourcing.

“They don’t have time to review RFPs (requests for proposals). In a lot of cases it takes a long time for the debt to be outsourced,” Cummings said.

Cummings said the key to dealing with government entities is the ability to interface with their management systems.

“If you have that ability to limit the amount of work put back on the government agencies, (outsourcing debt collections) can get up and running faster,” he said.