THE WAGES OF VIRTUAL SIN: Debt Farming

The sale of debt obligations to ‘debt farmers’ is a particularly insidious practice of present day business. Portfolios of unpaid and disputed bills from phone, credit card, utility companies or retailers are routinely sold to specialized firms for pennies on the dollar. This may be a very profitable operation for the purchaser if the firm is able to realize even a fraction of the outstanding debt.

If, for example, ABC Farmers, Inc. pays as much as twenty cents on the dollar, the firm will make a gross profit of 20% by collecting on two out five of the outstanding bills. The more ABC collects, the greater its profit. Expenses are quite modest since all that is needed for this debt collection business is a computer for producing and emailing statements, a phone for calling ‘customers’ and a bank account for accepting payments. Also helpful is the tenacity of a pitbull in the collecting process.

This type of ‘farming’ is reminiscent of tax farming in the Roman Empire. An ancient tax farmer made an advance payment to the state in exchange for the privilege of collecting taxes within a given territory. The more the taxes collected, the more the profit. Once the ‘contract’ was let, the state effectively washed its hands of the matter. Much the same conditions hold for debt collection today.

It is not in the interests of the modern debt collectors to try to determine how much, if anything at all, is actually owed on a particular account. A bill included in the portfolio purchased by ABC, for example, might be for a debt that was cleared through a legal bankruptcy proceeding. The interest of ABC is to try to collect regardless of the disposition of the debt. It costs little to send threatening letters, and if the alleged debtor eventually succumbs to all the badgering, ABC adds a bit more to its coffers.

Potential for abuse grows as obligations to pay are detached from the original transactions in which they were incurred. A company selling a product or service has some incentive to treat its customers fairly, if only to promote return business. The owner of an abstract debt obligation has no such incentive. Cynical practices are rewarded since people sometimes pay off balances that are not due simply to escape further harassment.

Companies sell accounts receivable for far less than the face value of the accounts because they believe the return on investment in pursuing delinquent accounts is not worth the cost. Possibly this policy helps the company’s bottom line in the short term, but it does not help to stimulate customer loyalty and has the long term social cost of reducing trust in the economic and political system.