Imagine being a judgment creditor trying unsuccessfully for years to get paid. You finally get so frustrated you are willing to sell the outstanding judgment to a collection agency. But wait. Selling might not be in your best interests. It could be that consignment offers you a better deal.
Two Different Business Models
Judgment Collectors is a Salt Lake City, Utah collection agency specializing in money judgment cases. They don’t work on any other types of debt. They explain that their industry offers two kinds of business models:
1. Purchase
Under the first model, a collection agency actually purchases the judgment as an asset. Purchasing gives the collection agency full ownership and all the rights conferred by the judgment itself. As for the creditor, he gives up ownership and all rights in exchange for the purchase price.
2. Consignment
The second model is the consignment model. Under this model, the collection agency provides services for which it hopes to be paid. But the agency only gets paid if and when they successfully collect. This is how consignment works. Payment is usually based on a portion of the amount collected. So if the agency collects nothing, they get paid nothing.
Why Creditors Might Choose Purchase
The purchase model can seem incredibly attractive under certain circumstances. Take the scenario described at the start of this post. Working on a judgment for years only to come up empty can be extremely frustrating. It is enough to cause even the most resolute creditor to throw up his hands in disgust. He would rather just sell the judgment and get on with his life.
Selling immediately absolves the creditor of any further responsibilities. While that is attractive, there is a downside: collection agencies usually pay pennies on the dollar. Rare is the case in which a collection agency will go as high as 50% of a judgment’s original value.
Why do collection agencies pay so little? First, they need to cover their own costs as well as leaving enough room to generate profit. They cannot afford to pay full price. More importantly, the amount the collection agency is willing to pay depends a lot on the debtor’s assets, income, and his ability to pay the judgment. The less confident an agency is in the debtor, the less that agency is willing to pay.
Why Consignment Is a Better Deal
Hiring a collection agency on consignment is often a better deal for a couple of reasons. Judgment Collectors works on consignment, and they say the most important factor is limited risk. Once a creditor assigns a judgment to the collection agency, there is no further financial risk. That is because the collection agency covers its own costs.
The other reason consignment tends to be a better deal is that collection agencies are highly motivated to collect as much as possible. Their payment depends on the amount they collect, so they typically are not willing to settle for a small amount just to get a case settled.
The one downside to the consignment model is that a collection agency needs to be reasonably assured of their own success. If they don’t think they can collect enough to make it worth their while, they generally won’t take a case.
Both Have Their Merits
Both business models have their merits. But for my money, consignment seems to be the better deal most of the time. Consignment eliminates the creditor’s risks but offers the promise of a higher payday. Selling makes the matter go away but forces a creditor to accept significantly less in return.
