Don’t make a drama out of a debt crisis

Following recent national press exposure highlighting increasing debt in private schooling, Andrew North offers advice on effective debt recovery

In this age of social networking and press sensationalism, a school’s reputation can easily be damaged by just one unhappy parent. Using insensitive legal debt recovery tactics against parents who (most possibly) are already suffering a form of life crisis, such as redundancy, separation or even a house move, can quickly lead to shock headlines and negative comments. At one time, this may have only happened within the parents’ association, but these days it is more likely to reach a much wider audience via Twitter and Facebook groups. As a private school’s reputation is the most important quality in selling its services to new parents, it is vital that the school’s reputation is considered an integral part of an effective debt recovery process.

Many schools head straight to their local solicitor when payments become overdue. Often, with little prior warning, the parent will receive a legal letter, threatening severe action and underlining the ultimate consequences of CCJs. In some circumstances, this may be all that is required to receive a cheque in the post but, as debt recovery tools go, the solicitor’s letter is a blunt hammer. It does not differentiate “can’t pay” debtors from that those than “won’t pay” nor seek to understand the circumstances of the non-payment of fees.

The majority of fee debts in this sector fall into the “can’t-pay” category. As this is often the result of family crisis such as the loss of a job or divorce, a threatening solicitor’s letter is likely to compound the family stress and lead to anger and resentment. Moreover, it is unlikely to recover the debt in the case of parents that simply can’t pay, because they will almost certainly have financial commitments of a higher priority at the time, such as paying the mortgage and food bills. The case will have to be taken further, and solicitors’ costs will quickly escalate from what initially might seem to be a cost-effective letter to extremely high hourly charges and compounding fees. The result is that, while debt can eventually be recovered through legal channels, the process will be lengthy and the net sum recovered a fraction of the original debt.

An alternative
An alternative method of debt recovery is to enlist the services of a debt collection agency (DCA). Many bursars and school credit managers might find that notion incongruous with keeping up a good public profile as the historic perception of a DCA was a company that would “send the boys round” to extract payment. Those days, however, are long gone. Modern DCAs are fully regulated by the Credit Services Association, licensed by the Office of Fair Trading and have an inhouse or partner with qualified legal service provider. This gives credit control managers a comprehensive toolkit of debt recovery procedures that can ensure effective, compliant debt recovery while maintaining the school’s exemplary public profile.

A good DCA will look at every case in isolation, rather than deploy a one-size-fits-all opening gambit. If the background circumstances are unclear, the DCA will open proceedings with sensitive communication with the debtor to understand the reasons for non-payment. In the majority of “can’t pay” cases, a payment plan agreement that suits both parties can be agreed, ensuring the debt is recovered and potential confrontation and/or bad feelings are minimised. Many parents will see this as an affordable way to keep their children in private education despite a family crisis.

For the “won’t pay” cases, further mediation is carried out to establish the reasons behind the non-payment. This may include outstanding issues with the service the school has provided. Again, in many cases, with a DCA acting as a mediator, issues can be resolved and the debt recovered to the mutual agreement of both parties.

Playing hard ball
While this soft front-end approach will resolve the greater number of private schooling debt cases, not every debt will be so easily recovered. It is here that the DCA approach can offer a fast-track, more cost-effective debt recovery process through a wide range of tools. These include:
• direct communication with the debtor to ensure they understand the full consequences of continued non-payment;
• tried and tested letter formats;
• legal letters before action; and
• full litigation and insolvency proceedings.

A good DCA will have a strict and effective methodology to its recovery proceedings and will run to a precise time-scale from start to finish. This constant pressure and escalating action is the most effective method of quickly resolving cases.

Time is of the essence to DCAs. Unlike solicitors, who usually charge by hours spent on the case, DCAs generally charge as a percentage of the debt recovered. It is therefore in their best interest to accelerate proceedings, recover as much of the debt as possible and close the case in the most timely and efficient manner. Each step in the recovery process will be fully documented, with full case-status and case notes available to schools online and in real-time. If the case goes to legal proceedings and even insolvency, the well-documented recovery proceedings will show that the school has already taken all due steps to retrieve the monies prior to legal action. This will stand the schools case in good stead in court.

In the current economic climate, bursars and private school credit managers have a wide range of options when it comes to recovering debts. Handling chasing and recovery internally is the best option for first contact with first-time debtors, but schools rarely have the resources to pursue more difficult debts with the persistence and firmness required. Using a solicitor’s letter will undoubtedly get some positive results, but it is a rather imprecise and reputation-risky tool. Outsourcing to third-party debt recovery specialist puts more time and resource into each case, allowing each to be handled individually with sensitivity and escalating recovery methods. Ultimately, employing specialist service provider such as a reputable DCA will result in more monies recovered in less time.

Andrew North MICM, director, Redwood Collections. Andrew can be contacted via www.redwoodcollections.com.

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