The head of the listed debt-management firm Credit Clear (ASX:CCR), Andrew Smith notes that a large energy retailer has tripled its customer hardship team in the last six months.

“Essential services are a litmus test of economic conditions because they take on all customers and don’t require credit checks,” he says.

The owner of the ARMA personal collections business, Credit Clear reported an 85 per cent rise in customer files in the March quarter.

“Since then the trend has accentuated and personal and corporate bankruptcies are up as well,” Smith says. “That shows how challenging things are.”

In theory, mounting bad debts mean more prosperity for the debt collectors, who either purchase delinquent debt ledgers from financial institutions and utilities, or collect the receivables on a commission basis.

Credit Clear exemplifies the latter approach, while Credit Corp (ASX:CCP) and Pioneer Credit (ASX:PNC) buy the purchased debt ledgers (PDL) outright, at a heavy discount to the face value of the debt.

They then use their technology-laden techniques – not baseball bats – to recover as much of the debt as possible.

According to the Institute of Mercantile Agents, there is $20.8 billion of uncollected debt in the country – and that doesn’t include at least $45 billion owed to the tax man.

A survey from released last week suggests the average Australian has $20,238 in personal debt, 11 per cent higher than a year ago.

Having been surprisingly resilient, consumers are succumbing to ratcheting mortgage rates and – for non-home owners – soaring rents.

“The rental cliff is going to be as dramatic as the home loan cliff,” says Pioneer Credit chief Keith John.

John reports a “marked tick up” in the amount of debt for sale since December. While the debt is not necessarily harder to collect – unemployment is still well off the problematic levels of 7-8 per cent – the average repayment is off about 3 per cent so far this calendar year.

“It’s a reasonable pullback and it reflects what is happening in the broader economy.”

Other factors are at play for the sector as well.

In recent times unsecured creditors have been less willing to sell debt because of reputational issues stemming from the over-eager way some outsourced collectors have tackled recoveries.

Westpac doesn’t sell any debt at all. When the lenders do tender their PDLs, pricing has been subdued. This is partly because the buyers need to tone down their recovery tactics and factor in lower returns.

Sector consolidation means there are fewer agencies.

Owned by Ilion, formerly Dunn & Bradstreet, Milton Graham last year merged with Recoveries Corporation, while Credit Corp subsumed the collapsed Collection House.

Credit Clear bought ARMA in late 2021.

Credit Clear’s Smith says large banks typically had both Milton Graham and Recoveries Corp on their supplier panels to ensure competitive tension, “so this is a huge opportunity for us.”

With apologies to Charles Dickens, it’s the worst of times for households and the best of times for the debt wranglers – or it should be.

Shares in Credit Corp, the undisputed $1.3 billion market cap leader have declined around 5 per cent over the last year and are half of their peak value of February 2020.

A key buyer of PDLs from financial institutions, the $34 million market cap Pioneer Credit has seen its shares decline 28 per cent year on year, although the stock has rallied 19 per cent since January.

Credit Clear shares have tumbled 32 per cent, valuing the company at $96 million.

An ongoing issue is that with few people willing to answer unknown phone calls, the collectors need to get cleverer with automation.

Swathes of debt will remain uncollectable. After all, how do you chase a teenage buy-now-pay-later customer over a $50 purchase?
This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.