Credit Unions and the Psychology of Debt Recovery (Guest Blog)

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Leading Debt Recovery lawyers, Wright, Johnston & Mackenzie LLP take a look at the psychology of debt recovery and how certain approaches can be helpful for Credit Unions. 

It is important to stress that there are a number of different types of arrears cases.  A uniform approach is not normally the best way to go and it is better to recognise the different natures of the member and then be guided by that.  In the event that the member genuinely can’t pay the full sum or indeed any of the sum due then it is important to have a realistic assessment of this from the outset.  It may be prudent to accept low level payments rather than to achieve nothing.  It is easy to allow anger over the fact that sums are due to your Credit Union to cloud your judgement.  However, any resentment would be compounded in the event that the Credit Union is  further out of pocket.

The most difficult of people to deal with are those who can pay but are simply reluctant to do so.  Often times, the most difficult thing to do is to try and get your voice heard.  It is fair to say that sometimes the person who shouts the loudest is the one who gets heard.

When negotiating with members it is important to try and ensure a consistency of approach.  Of course, this also applies to the members themselves and I would always stress to any of my clients who are in a negotiation regarding settlement that they should make a realistic offer to settle matters.  There is very little point in making an offer that is known to be unfeasible as you will lose credibility in terms of the negotiation.  In general terms, I would advocate that provided somebody abides by the agreement they have entered into then no further steps would be taken.  However, in the event that it becomes clear that they are not going to abide by the terms of settlement that were agreed, then I would suggest that a very robust approach is required as at that stage.

There is also a psychological as well as a financial aspect to debt recovery and this has been an increased focus in academic studies. A report by an academic of economic psychology, Professor Alan Lewis of the University of Bath, has indicated that the best approach is to be assertive without being aggressive.

Research also suggests that an effective debt collection approach is one where the debtor is treated early before becoming too “ill”. This is a useful way of thinking about the position although getting the member to speak to you at an early stage is often difficult. Professor Lewis also noted “agents that have the higher success rates are those who take a collaborative approach and there is never any sign of them antagonising customers even in the mildest way.”  This would seem sensible as it is perfectly possible to be robust in trying to recover the sums that are due to you but without falling out with people. For Credit Unions, as organisations who try and support their members, this does not tend to be an issue.

Professor Lewis also suggests that posing a question rather than simply making a demand is likely to be received more favourably and also that if you offer solutions such as being prepared to accept payments by way of longer installments then this is more likely to lead to an effective recovery.

There has also been a study on the psychology of debt collection.  This is based on a theory that everyone has three ego states, the parent ego state, the adult ego state and the child ego state.  The theory suggests that all three are required to be healthy, normal human beings.

  • The parent ego state is simultaneously nurturing but also judgemental.
  • The child ego state is the one in which emotional responses come out.
  • Finally, the adult ego state represents objective logical thinking.

The suggestion is that if you try and approach debt collection using the parent ego state then the member reverts to the child ego state.  This is on the basis that one party is judgemental and the other party responds by becoming emotional.  The best state to try and ensure an efficient recovery is the adult ego state.  This is where information is sorted out, decisions are made and problems are solved.  By using the adult ego state logical references can be made to signed Contracts or Financial Agreements and a debtor can be reasoned with in terms of the importance of abiding by the Agreement that had been reached.

There is also a recognition that sometimes there may be a clash of personalities and it is advised that if matters become too emotional then the conversation should be discontinued and somebody else should deal with the matter if possible.

There is also the useful suggestion that by using information gathering questions, which will be open questions, then it is likely that you would get the information that you need to solve any problems.  Again this can be useful for getting a difficult relationship back on track.