For Europe's Debt Collectors, More Work Isn't Paying Off
July 07 2013
By : Manuela Mesco
MILAN—In Europe, bad debts are soaring, the economy is contracting and business owners are flocking to debt-collection agencies to chase down deadbeat clients.
Yet the boom in bad debt is bringing surprisingly little joy to the Continent's repo men. Clogged courts, tough debt-collection rules and tapped-out debtors are making their jobs harder—and less profitable.
Consider Marco Alborghetti, a Rome-based debt collector. He recently resolved a case involving a €10,000 ($12,825) debt owed to a client, the owner of a leasing company. It took 10 years to pursue the debtor through Italian courts. While the client recovered the entire amount, Mr. Alborghetti says the hassle, as well as the cost of hiring lawyers to pursue the case, hardly made the job worth it.
"It's just uneconomical for everyone involved," he said.
The protracted recession in Europe has left the Continent laboring under a mountain of unpaid bills. European companies wrote off about €350 billion in bad debts last year, up 40% from 2007, according to credit-management firm Intrum Justitia IJ.SK +1.21% . In Europe's troubled south, where the business downturn shows little sign of improvement, bad debt has soared 60% to €85 billion since 2007.
The recovery of bad debts is critical to smaller businesses, which make up the vast majority of employers in Europe and are currently starved of capital. Yet a mix of bureaucratic frustrations and stringent laws make it exceedingly difficult, and costly, to go after debtors.
Indeed, the difference between debt collection in the U.S. and in Europe is stark. In the U.S., a large chunk of debt is held by consumer-credit organizations or lenders that finance the purchase of items such as cars. As those items are considered security for the debt, the lenders can often seize them quickly—even after just one missed payment—without going to court. Businesses looking to recover a bad debt must typically go to court, but the proceedings are relatively quick.
The situation in Europe is far tougher. Even consumer-credit organizations looking to repossess items bought with credit must go to court in most European countries. But that can take years. According to the World Bank, it takes 1,210 days on average to resolve a court dispute in Italy, while many cases drag on for a decade, lawyers say. In Spain and Greece it takes 510 and 819 days, respectively, compared with 370 in the U.S.
For instance, Andrea Ruggeri, a Milan-based lawyer, is currently trying to claw back for a client €500 worth of tickets for an event that was canceled in June 2010. He filed the case last October, and the next hearing is scheduled for September 2016.
As a result, debt collectors typically shun the courts and are instead investing more in training and extra personnel to try to persuade debtors to make good on their bills. For instance, Mr. Alborghetti hired a funeral-parlor owner for a month of full-time training in an attempt to understand the most sensitive way to approach debtors.
But all this costs. Virgilio Castri, owner of an Italian agency, Raska Service, has added about 20% more staff to keep up with extra demand over the last two years. He hired lawyers to train his staff in legal issues entailed in debt collection and sought staff with public-relations skills that might help persuade debtors to come clean. But despite the extra investment, he recovered 15% less in debt and his company just broke even last year.
Indeed, while Italy's debt-collection-sector revenue rose to €748 million in 2012 from €501 million in 2008, many agencies are struggling to turn a profit, according to Unirec, the industry association. Italian third-party collectors were able to recover about 22% of debts outstanding last year, down from more than 30% in 2007.
The situation is similar in Spain. The National Association of Debt-Management Entities says demand for its members' services has skyrocketed during the country's economic crisis.
But business isn't great. Debt-collection firms are paid based on how much money they actually collect, says José María de Gregorio, manager of the association, also known as Angeco. But collecting money has become very tough in light of Spain's dire economy. Revenue for Angeco members increased slightly to €247 million in 2012 from €239 million in 2010 even as they were tasked with collecting exponentially more debt—€90 billion in 2012, compared with €30.1 billion two years earlier.
"There's more what we call rocky debt," Mr. de Gregorio says. Dislodging money from debtors' hands is "easier when people have more cash flow."
Italy's new government has made judicial reform a priority and recently approved a decree aiming at cutting the time it takes for a case to reach a final verdict, including compulsory arbitration for some civil disputes.
Yet few expect real change any time soon. "The bottom line is that you take whatever you can, even when it's a little," says Mariano Bucciarelli, head of a debt-collector agency in Milan. "There's just no money around, and there's no point in embarking on a never-ending lawsuit."