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December 5th, 2008
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Debt collection by agencies almost doubles

Rise in consumer loans behind growth

By Paul Voosen
Staff Writer, The Prague Post
May 28th, 2008 issue

They write you letters. They call you at home and send text messages. Occasionally, they’ll even knock on your door. And they’re almost never, ever welcome.
They’re professional debt collectors, the agencies employed by a gamut of companies, from mobile phone telecoms to credit card providers, to track down delinquent customers and extract payment. It’s grueling, unpopular work — and it’s growing.
Last year the number of consumer debt collection cases passed to agencies almost doubled, according to recent survey results released by the Association of Collection Agencies (AIA), which represents the country’s largest debt collectors.
The past few years have seen a surge in consumer loans, which has led to a rapid increase in household debt. It’s then natural that, as debt increases, more people slip in their payments, said Radek Laštovička, the managing director of the collection firm Coface.
“Simultaneously, the providers of these loans … have developed more efficient collection procedures, which more often include outsourcing collection to specialized agencies,” he said.
Collection agencies are a relatively new phenomenon in the country and the practices they use can sometimes traipse the limits of legality, according to Michal Kebort, a financial specialist from the Czech Consumers Defense Association.
“They’re usually very successful in moving on the border of the law and good morals,” he said. “We’ve found no occurrence of explicitly unlawful procedures. Mostly they use questionable procedures.
“What’s on the verge of acceptability is that debtors’ relatives or close friends are frequently contacted [by the agency]. Here I would ask where the agency got this information and whether the Act on Personal Data Protection has been breached.”
Once debts are in the hands of an agency, the first step is to seek an out-of-court settlement, said Arne Kejdana, spokesman for Profi Credit.
“We try to get in touch with the debtor. We make calls, send letters and try to propose some kind of agreement,” he said.
Coface begins with mail and phone reminders and then will sometimes add SMS reminders, Laštovička said, adding that “personal visits are used to verify the contact address and, sometimes, to personally deliver written reminders.”
The prime sources for debt cases passed to collection agencies are non banking personal loan providers, banks issuing credit cards, telecoms and utilities, according to Coface.
Most debt cases stem from administrative issues or short-term cash problems and can be solved simply through regular communication. Every so often, however, you will find that “some debtors are notorious liars and [our staff] should be able to recognize that,” Laštovička said.
Debts to grow
Even with last year’s increase, the number of collection cases remains low compared with Western Europe, largely because household debt has room to increase further.
“Household debt is still far below West European standards,” Laštovička said. “We’re probably just at the start of the expansion of the consumer debt collection industry in the Czech Republic.”
The ratio of Czech household debt to gross domestic product increased by seven percentage points to 29 percent in 2007, according to the Czech National Bank (ČNB). However, this is well below the ratio in the eurozone, which is 61 percent. By the end of March, household debt totaled 756.14 billion Kč ($47.4 billion), an amount that could well top 900 billion Kč by year’s end, according to GE Money Bank.
While growth in mortgages, which constitute a significant portion of household debt, slowed in the first few months of this year, consumer loans accelerated in the first quarter, according to the ČNB. Some banks reported double-digit increases in demand for these loans, which are more likely to eventually end up in the hands of collection agencies.
Banks are careful when they turn these debts over to agencies, only working with agencies with “proven track records,” said Jan Slanina, a credit manager with Poštovní spořitelna. The bank has not seen a disproportionate rise in the number of collection cases, he added.
According to Slanina, there are two situations where Poštovní will turn over a debt to agencies: Either the client cannot be contacted, because of invalid mailing addresses or unconnected phones, or the client has not shown a reasonable effort to pay his or her debt for an extended period.
The bank’s reasoning highlights why it is important for consumers to stay in touch with their creditors, even if their finances are perilous, Kebort said.
“The basic rule is to act. The worst thing a debtor can do is to stop communicating,” he said. “In that case he or she is going to face the possibility of a new penalty or fine.”
Once cited as a major problem, public awareness of the dangers of excessive debt have improved, Slanina said, though there is work left to be done. Poor people in particular “have a very low awareness of the dangers [of debt],” Kejdana said.
Collection agencies do their best to avoid taking debtors to court, using legal proceedingsonly as a matter of last resort for the most unresponsive cases, according to Kejdana. A revised bankruptcy law that came into effect this year has done little to improve the situation, Kebort said.
“Politicians and the public had high hopes for the insolvency act,” he said. “But it doesn’t work well in reality.”

Paul Voosen can be reached at pvoosen@praguepost.com


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