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5 Ways Debt Collection Helps the Economy

Debt collectors often get a bad reputation.

Part of the problem is that most of us have had a bill we couldn’t pay right away or experienced a time when money was tight. We sympathize with those who are in a tough spot or who just received that six-figure bill from the hospital for emergency surgery.

But what about the other side of things? You might consider the business owner who can’t keep going because his customers aren’t paying their bills. After all, he provided a service and earned the money.

Here are five ways debt collection helps the economy keep moving:

  • Cash FlowIn 2013, third-party debt collection agencies recovered about $55.2 billion in total debt. (Source.)
  • Payroll – Third-party debt collection helps organizations make payroll. In 2016, the industry brought in $12.6 billion in total payroll nationally. (Source.)
  • Tax Base – The debt collection industry contributes to the federal, state and local tax base. In 2016, third-party collection agencies and their employees accounted for $852 million in taxes paid at the national level and $677 million in state and local taxes. (Source.)
  • Stabilizing LendingThe industry’s contributions aren’t just flat figures, either. As one study put it, America relies heavily on credit, and debt collection stabilizes the market, “allowing lenders to make more loans while managing their own risk.”

Preventing Overborrowing
Finally, debt collection may help avert overborrowing. A paper by a Princeton graduate student and an employee of the Federal Reserve Bank of New York found that restrictions on debt collection industry may hurt more than help consumers. As The Economist explained, the paper found:

“Borrowers in states where debt-collection practices are more strictly regulated find it moderately harder to access credit, because lenders cut back. Borrowers in states where debt-collection practices are less intense (owing to stricter rules) received on average $213 less in car loans and $136 less in retail and other personal loans than borrowers in states where debt collectors had a freer hand.

That is because a robust third-party debt-collection industry partially insures lenders against excessive losses, in much the same way that personal bankruptcy protects consumers. Without the deterrent effect of third-party collectors, consumers are likely to assume more risk and to overborrow.”

 

Most people don’t want to interact with a debt collector, which is why we try to make it an easy process. Find out more about our approach to collection in our post 5 Myths about Debt Collectors.