Debtor Psychology 101

We are continually asked about the debtor psychology techniques our collectors use to get such quick results. Our collectors are highly trained professionals with decades of experience, so identifying the type of debtor psychology they are dealing with is involuntary.

Identifying the dominant psychological traits tells an experienced collector what will motivate the debtor to pay. Besides pressing for payment, the first call is extremely important, as an experienced collector will be able to determine what type of debtor they are dealing with. Different debtor types require different motivational strategies based on their personality and how they react to formal demand for payment.

There are 3 basic types of debtors. The faster a collector recognizes the type of debtor they are dealing with, the better their odds of a successful recovery. As a rule, delinquent debtors fall into 3 basic personality types:

1. Circumstantial Debtors

The least common kind of debtors for a collection agency are the ones who have had a change in circumstances. Their bad luck could be an uninsured fire, theft, loss of employment, etc. Most of these people normally pay their bills and will pay when they have the money.

It might be the temporary income reduction because of a natural disaster, such as a flood. It could be poor market and employment conditions in their community or industry. Usually, this kind of debtor can be taken at face value and the odds are they will dig themselves out of their current predicament. These type of debtors have the highest rate of recovery.

Circumstantial debtors are common in third party debt collection. A debtor with this type of dominant personality trait is usually easy to negotiate with. However, it should be noted that if their financial situation is extremely dire, they can exhibit personality traits from the next two types of debtors.

2. Disorganized Debtors

Some debtors are victims of their own disorganized management. When incurring a debt, they sincerely intend to pay on time, but are unable to follow through due to poor decisions. Sometimes poor judgment causes this type of debtor to overbuy, or be overly optimistic.

Many of these debtors are robbing Peter to pay Paul. They have the best intentions but something always seems to come up that has a higher priority. This type of debtor is prone to making successive poor decisions which can cascade into disaster. When making payment arrangements with this type of debtor it is preferable to utilize legal tools such as directions to pay, undertakings, consent Judgments, wage assignments, etc.

One of the biggest sources of this type of debtor in commercial debt collection is sales managers who insist on granting credit to customers who are poor risks. Even though they know that these customers cannot pay on time, they just want to close the deal.

3. Serial Debtors

Fortunately, dishonest, or fraudulent debtors are a small percentage. Serial debtors are always looking for a loophole to get out of paying a debt. For some serial debtors avoiding their obligations is a game and they never have any intention of paying. These are the riskiest debtors, as they are always scheming of different ways to cheat creditors.

Stall tactics are standard for this type of debtor. They want to run out the 2-year clock. Most provinces have a 2-year statute on suing a debtor. In BC and Alberta, you cannot sue for a debt that is over two years old from the date of last payment, or date of invoice if no monies were ever paid. Most serial debtors couldn't care less about their credit rating and know the creditor can't do anything after 2 years.

Commercial serial debtors will order merchandise on a cash basis for the first few times and pay like a bullet. Then they request a line of credit for an order in excess of their normal needs. All of a sudden they become evasive and difficult to contact. When you do catch them, they make promises they don???t keep. Evasion is one of the standard stall tactics used by serial debtors.

Commercial serial debtors like to play limited company roulette. They will incur debts under a limited company name and refuse to sign a personal guarantee, as a condition for a line of credit. Over a period of time the limited debtor company will liquidate and lo and behold, the assets have been moved to another limited company. It is amazing how many serial debtors use this scam.

Serial debtors like to put their assets under their spouse's name so creditors can't attach their property and other assets, such as vehicles. They also like to hide assets under different limited company names. The point to keep in mind with serial debtors is to move as fast as you can to collect. Serial debtors use time, deception and legal loopholes as a weapon. They are one type of customer you can afford to lose.

If you suspect you are dealing with a serial debtor it is probably time to list their account with In-House Receivable Services.

Hybrid Debtors

Some debtors are extremely moody and seem to have multiple personalities. One day they act like a circumstantial debtor and the next time you are dealing with a serial debtor. A hybrid debtor is a combination of the 3 types of debtors listed above. Basically, they are constantly changing their dominant character traits and negotiating can be like nailing Jell-O to the wall.