Beware of Doubtful Debt Collectors

Accountants, being used to the concept of audited trust accounts, may be surprised to learn that debt collection agencies don’t actually use them. Many of them have an account which they call a trust account and label as such on the cheque book but that’s just little fiction that they share with the bank.

Given the misunderstanding that exists amongst debt collectors about the difference between these apparent trust accounts and real ones, it’s hard to take the word of the manager of a collection agency who says, “oh yes, we have a trust account.” Most would struggle to pay for an auditor. Debt collection is a hard game to make money at.

However, a few perhaps even three or four Australian agencies have real trust accounts.

If a business with no real trust account is collecting your debts, you may well find one day that it goes into receivership and the money it has collected on your behalf is seized by the bank. That’s what happened to Creditman Duns, until then Australia’s largest collection agency, in the early 1980s.

The other risk, of course, is that the business is not passing on money it has collected. There are currently 148 listings for debt collectors in the Yellow Pages. Every year a handful or two of these close and every year creditors learn a hard lesson from the experience.

At least with an auditor there is a chance of any problem being picked up early. Often, the way creditors find out about the problem is by giving the debts to another agency to collect. Dissatisfied with the first agency’s performance they take the debts back and try someone new. The second agency reports that many of the debtors claim to have paid the first agency.

An agency with a relaxed attitude about passing on clients’ money has a business with great cashflow. It’s also a hard competitor for a legitimate player to match.

I don’t know how many agencies play this game but at any one time in Auckland, a city with 48 listings of debt collectors, there are stories of up to half a dozen agencies that have been seriously dishonest. Some of them survive despite everything. They pay the clients who complain and carry on skinning the more ignorant clients. Few face prosecution. I know of only one, in Nelson, who I know for certain has been convicted in the last three years that I have been writing on credit matters.

Others set up, develop a client base, then leave quickly with the takings. One crook, most recently heard of in Queensland, uses much the same advertising each time. It’s slicker than that of most of his competitors and apparently he’s a good salesman. He’s been involved in at least four failed collection agencies that I’m aware of in Australian , not counting the poor suckers he sold collection agency franchises to. The investigating accountant at the Companies Office in Canberra had a file six inches thick on him several years ago. I know he’s been barred from being a director now, and he’s also barred from holding a licence to collect debts in Queensland.

Yes, Queensland and most of the rest of Australia requires licences, bonds and trust accounts. At the moment there is no government regulation of the Australian collection industry, but it will come, one day. Every other country in the world is regulated, and for good reason.

Under the new Credit (Repossession) Act, from 1 July 1998 repossession agents in Australia will have more controls over them than debt collectors. If you’ve murdered someone or within the last five years committed an offence of dishonesty you can’t repossess goods. You have to give up that job, but never mind; you can still be a debt collector.

About the author: Antony Firth