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Rising debt rates
There's a lot of personal debt to chase after these days, more than ever in fact. Trend-wise, the gap between household debt and disposable income has been growing steadily since 1997, a watershed year when household debt surpassed income. As of last year, debt stood at about $245,000 per household while disposable income was about $130,000.
In 1988, the ratio of household debt to disposable income was 64%. In 2015 it was 185%. And life is getting more expensive. In our most recent Consumer Pulse survey, eight out of ten Australians reported that household bills and expenses had increased over the previous 12 months, and 36% said they had increased a lot.
In terms of Gross Domestic Product (GDP), Australia is leading the world in borrowing versus producing. Australian citizens and residents borrow 25% more money than is created by the economy – the theory being that the economy is bound to make up the difference, presumably through the steady rise in housing prices. (Those who were burnt by the GFC might call this a dangerous game, but that's another story.)
Most of this is mortgage debt, not the type that debt collectors generally go after (the bank just takes your house if you don't pay). But the numbers set the tone for an economy in which debt collection businesses find plenty of work.
Smaller firms less compliant
There are some big players in the highly competitive Australian debt collection market – firms such as Dun & Bradstreet or ACM Group – but 95% of debt collection agencies are small operations employing less than 20 people. And 63% of them turn over less than $200,000 a year.
Barriers to entry are low. At the moment there are roughly 551 debt collection businesses in Australia scrambling to grab their piece of the bad debt market. In total, the industry is pulling in about $1 billion a year in revenue.
It's not hard to see how abuse might occur with so many debt collectors prowling about. The smaller firms that dominate the market generally don't have the technology to keep track of whether they're violating restrictions such as contacting debtors too often, the main cause of complaints.
The smaller firms have a notably worse compliance record than the larger ones, and the vast majority of firms are small.
Rough play in the debt collection market goes back a long way in Australia, as it no doubt does in many other countries. An article in a 1978 edition of the Monash University Law Review, for instance, makes the case that "unfair debt collection practices are widely used in Australia", particularly the practice of businesses sending out letters doctored up to look like they're from debt collections agencies or the legal system itself.
Practices such as this are specifically outlawed by current legislation, as is publicly shaming people or threatening their jobs or credit ratings, tactics that are also mentioned in the article and that still happen today.
Threats and intimidation
2012, Victoria's Consumer Action Law Centre (CALC) released a report detailing several instances of heavy-handed tactics by debt collectors chasing overdue energy bills, a sector where there are plenty of unpaid bills. The tactics including threatening to repossess a woman's car, insisting on unaffordable payment plans and calling debtors up to six times a day.
Another Victorian whose case was taken on by CALC cancelled an energy contract within the cooling off period but fell into the hands of a debt collection agency anyway. Through some kind of mix-up, Lumo Energy continued to bill her even though she was receiving energy from a different provider.
Seeking to recover $188.95 from the 69-year-old single pensioner who lived on less than $26,000 a year, debt collectors acting for Lumo called repeatedly, sent threatening letters and visited the woman's residence.
And in June this year, the ACCC started court proceedings against the debt collection firm ACM Group, which was chasing debt sold to it by Telstra. The ACCC has accused ACM of telling debtors that legal action was about to commence when it wasn't; of saying their credit rating would be adversely affected without having grounds to say such a thing; and of generally over-contacting and harassing the debtors.
In 2012, ACM was convicted of harassment and coercion – including threatening to publicly expose debtors – in a court case brought by ASIC.
Counsellors at Financial Counselling Australia told us it had recent evidence of debt collectors violating guidelines by contacting neighbours or relatives, making false statements and issuing threats.
Bad debts, bad debtors
To be fair, there may be more bad debtors out there than bad debt collectors, although that doesn't excuse unethical or illegal behaviour by collectors. According to one industry source we spoke to (a former debt collector who has worked for both large and small operations), most agencies try to do the right thing, and small agencies in particular are careful not to break the rules for fear of losing their licence.
"Workplace cultures can vary massively in the industry," the woman tells us. "With smaller firms, you have more discretion over how to approach the situation, which makes sense because debts are so personal. With the bigger firms, it's all about roto-dialling and there's much less flexibility. If you're caught overstepping the boundaries they put you in for training. With smaller firms you'd probably be shown the door."
But she doesn't hesitate to point to bad actors on the loose.
"There are people in the industry that take a lot of licence with the law," she says. One favourite trick is to indirectly expose the debtor to someone in a position of authority over them, since directly revealing that a person is being pursued by a debt collector is strictly prohibited.
The tactic involves contacting the authority in question and saying the debtor should get in touch "so we can resolve this matter" or similar language. It doesn't take much for the person in a position of authority over the debtor to read between the lines. Debt collectors who are adept as such tactics are in demand and tend to thrive in the industry, although this approach would only happen if the collector wasn't able to contact the debtor through other methods.
Then again, some people habitually welch on their debts to the detriment of creditors who can't afford to be stiffed. "I had a lot of clients who were mum and dad businesses, and these people just can't wear the cost of unpaid debt. Unless you turn the heat up just enough to make them sweat and realise the matter's not going to go away, they won't take it seriously."
Who's in charge?
Regulation in the debt collection sector is a bit of a mess. Different states have different regs, and enforcement bodies vary as well. Consumer protection is looked after by both ASIC and the ACCC, but actual enforcement is left to state fair trading agencies, the police, or a combination of both. As a consequence, oversight and enforcement of the rules is less than spot-on.
The federally applicable Australian Consumer Law (ACL) doesn't directly address the issue of debt collection, but it does include a ban on harassment – a recurring problem in the sector.
Debt collectors need a licence to operate, except in Victoria and the ACT, and the criteria for getting a licence varies considerably between jurisdictions. Generally, a person has to be of "good character" and have a basic understanding of the laws governing debt collection to go into the debt collection business.
The Victorian model
Victoria has its own set of rules, which take a more pre-emptory approach. Anyone who's been convicted of coercion, harassment or physical violence can't become a debt collector, lest they draw on these tendencies in their new job. The state also provides protections that go beyond those that apply to other states and territories.
Do's and don'ts of debt collection
What a debt collector can do:
- call you on the phone
- visit you in person
- send you a letter or an email or contact you on social media.
What a debt collector can't do:
- call you more than three times a week
- call you outside the hours of 7.30am–9.00pm on weekdays or 9.00am–9.00pm on weekends
- visit you in person if you've already made an agreement over the phone or by email
- contact you on social media or by email if someone else may be able to see the communication
- threaten, intimidate or harass you in any way
- make false claims about what will happen if you don't pay the debt
- impersonate a legal or government authority.
What a debt collector also can't do in Victoria:
- enter a private residence without lawful authority
- refuse to leave a private residence or workplace when asked
- use official-looking documents than aren't actually official
- threaten to disclose the fact that you have an unpaid debt
- contact you by a method that you've asked not to be contacted by
- contact you when you've requested in writing that no further communication should be made, unless the contact is about legitimate legal action.
Tips from Financial Counselling Australia
Financial Counselling Australia (FCA) is the peak body representing 800 financial counsellors around the country who provide free financial advice on a variety of subjects, including the subject of debt recovery.
We talked to the FCA about some of the current issues in the debt collection space and what to watch out for:
- Some debt collectors may try to push you into unaffordable payment agreements without properly assessing your other debts and your ability to pay and working out a payment agreement that makes sense, as they're supposed to do under ACCC guidelines.
- Many debtors avoid collection agencies rather than engaging with them and making sure they follow the guidelines, especially regarding frequency of contact and method of contact – you can put a stop to being called at work, for instance.
- As above, many consumers don't know their rights when it comes to debt collection or that they can lodge a complaint with the agency itself, the ACCC or ASIC if they think they're being harassed – knowing your rights can give you considerable leverage when dealing with debt collectors.
As one financial counsellor in FCA's Policy Advisory Network puts it: "Contact three times per week is not so bad when it's three times because the client picks up the phone and engages with the collector. Contact 20 times a week or more because the client refuses to pick up the phone or picks up and hangs up is worse."
Need help? Contact Financial Counselling Australia at firstname.lastname@example.org or call 1800 007 007 to talk to a counsellor in your state or territory.