If It Ain’t Broke, Don’t Fix It: Rethinking “Low” Balance Litigation

When it comes to how businesses in corporate America operate, how many times have we said or heard that? How many times have you heard “It’s the way we’ve always done it” when you ask why something is done a certain way. There are so many examples of how a process is like concrete inside a company — once it hardens, it becomes impossible to break.

In our corner of the financial services industry, how a company manages its low-balance charged-off accounts fits squarely into this situation. Let’s set aside the relativity of what defines “low balance,” because if you ask 10 people for a definition, you are likely to get 10 different answers. Irrespective of its definition, low-balance accounts tend to be treated like the change that falls in between couch cushions — all-but forgotten until you re-arrange the furniture. We feel it’s our job at Harvest to provide some new thinking surrounding the litigation of low balance accounts. 

For this article, we looked at a significantly large random sample of charged off accounts with an average balance of $3,650 that were assigned to law firms for litigation from 2016 to 2019. We divided the accounts into four balance ranges as shown below.

Balance RangeAverage BalanceGross Liq%*Average Costs Per AccountNet Liq%*Return on $1 of Court Costs Expended**
Under $3k$1,848 —$162 —$2.70
$3,001-$6,000$4,172 —$178 —$3.90
$6,001-$9,000$7,259 —$172— $6.80
Over $9,000$14,951 $174 $8.70
Grand Total$3,650 $168 $3.70
*Redacted cells in table above can be obtained by contacting Harvest Strategy Group.
** The amount recovered for every dollar in court costs spent

The analysis shows that accounts with a balance under $3,000 had:

  • The highest gross liquidation rate (135% of total average)
  • The highest net liquidation (116% of total average)
  • Lower court costs per account

The small balance segment only trailed the higher balance segments on the metric of Return on Court Costs Expended. A 2.7 times return on cost expended, while lower than the other balance ranges, still represents a significant return and should be weighed against other available recovery strategies. 

This analysis further supports the importance of a sound segmentation strategy is to recognizing the benefits of a legal collection program on low balance accounts. Many companies use a flat minimum to determine strategy qualification across their entire portfolio and ignore other critical factors, therefore resulting in significant lost opportunity cost.

Before including these accounts in an agency waterfall, packaging them up to sell (where without question, said buyer will be implementing a litigation strategy) or worse off, warehousing them, it is critical to determine balance thresholds on a state-by-state basis. If someone is committed to pursuing this strategy for themselves, the first task is understanding how the fixed attributes below vary by state;

  • Filing fees
  • Service fees
  • Garnishments – All but five states allow garnishments
  • Statute of Limitations

ProScore, Harvest’s proprietary and predictive legal selection and scoring segmentation model will marry the variable attributes of the file with the fixed attributes above to definitively understand what percentage of the low balance accounts qualify for legal treatment. This next step is critical in determining the predictability of the portfolio and the recoverability at the consumer level. This level of sophistication is often the exact reason why our clients align their recovery strategy with ours. Once these factors are determined, you will very quickly and accurately be able to determine the balance threshold, at the state level, to recognize recovery lift from a legal strategy on this neglected segment of a portfolio.

We have already noted the importance of not waiting for the pandemic to be over to make the decision to deploy a legal collection strategy. Properly selecting accounts best suited for a legal strategy will net anywhere from 3x to 8x in return compared to running those same accounts through a traditional collection waterfall or loan sale.

For more information on Harvest or specifically maximizing the net return of a “low balance” portfolio, contact Jamie Welsh at (303) 531-0654 or jamie.welsh@harveststrategygroup.com.

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