As transatlantic lending becomes increasingly available to financial institutions, Andrew Jackson and Scott Taylor, of Funding Circle, compare debt recovery cultures and collections strategies in the UK and US.
You say potato and I say spud. You like fries and I like chips. There are many other (and more important) differences between the US and UK, but whether you are in the US or the UK, dealing with businesses in distress is both a science and an art.
The science comes from knowing your options, commercially and in law; the art comes from being able to help a distressed business return to solvency. The goal is the same – to get the money back. However, there are key differences in culture between the US and UK. These differences impact every stage of the lending cycle, including the reliability of credit information and the effectiveness of recovery action.
Culture: borrower vs creditor friendly
The US may be described as a ‘borrower-friendly’ jurisdiction. In certain states, such as in Louisiana, it is almost impossible to enforce a money judgment, which makes credit very expensive.
This borrower-friendly culture emerges from a society where high-risk is rewarded, and failure is forgiven. From the enormous risks of the first settlers to the pioneers of the industrial revolution and the current technological revolution, brave decisions mean big wins. With such a strong emphasis on risk-taking to make success, on a personal and national level, failure is not an option. Failure is rebranded as opportunity for renewal and growth. While this may not necessarily encourage financial responsibility by ambitious borrowers, if the risk is priced correctly, then simply: buyer beware.
Traditionally, the UK has been ‘creditor-friendly’. For centuries, debt was a tool for control – usually in the form of unpaid taxes to the landlord or sovereign. In the Middle Ages, the UK became a trade centre where bills of credit and the strong rule of law enabled the country to flourish in an international market. When debts were not repaid, creditors could act swiftly to seize assets and control. The laws of the UK sought to marry risk with responsibility. The impact of this is that, while borrowing may be cheaper, the economy may suffer slower growth and businesses may lose out to their more agile US competitors.
The UK has several sources of valuable credit information. There is statutory reporting in The Gazette, the centralised company record system of Companies House, the bad debt reporting system of CAIS, CIFAS for fraud data, and other field ‘big data’ pulled into credit reference agencies, which give real-time updates of credit scores and debtor days past due. There is also a huge amount of information available on individuals through Experian or Dun & Bradstreet, and the Land Registry, all of which are easily accessible for daily monitoring.
In the US, with the vast geography to cover, there are 4 main large credit bureaus. In addition to the old school credit reporting agencies, there are an additional 45 credit reference agencies that cover anything from medical to utilities, auto insurance to rent payments.
Much of the credit assessment is based on documents provided by the company, which have not been verified by a third party. The regulation around privacy and banks providing any verification has made such validation extremely difficult. In light of this, lenders need to be local and have close relationships with their borrowers and/or they need to use innovative technology to verify credit information.
When a business has failed, formal insolvency procedures may be the only option for recovery. The key difference between the US and the UK is control. Chapter 11 (administration, in the UK) leaves the directors in control of the business, and Chapter 7 (liquidation, in the UK) is also a light touch.
In the US, bankruptcy is regarded as a ‘relief’, and the main petitioner is usually the company or the individual itself. For individuals applying Chapter 7, not only can the bankrupt retain his residential property (in most cases), tools of trade, and a monthly income of up to $10,000 a month, they also wash off most of their creditors (excluding certain taxes) and can be out of bankruptcy within 3 months. That said, under US law, an individual can be refused bankruptcy relief if they took credit within 90 days of applying for bankruptcy, or if they have sufficient means to pay their creditors.
In the UK, bankruptcy lasts for 12 months, assuming that the individual cooperates fully with their trustee. During this time, the individual cannot be a director or involved in the formation or management of a company. The individual’s assets are thoroughly investigated and any realisable assets (including residential property) are sold for the benefit of the creditors. There is also a significant stigma attached to bankruptcy. It will remain on the individual’s credit file for 6 years, making it difficult to get credit in that period. Entering bankruptcy in the UK is very quick. If a statutory demand remains unpaid for 21 days, and the creditor is owed more than £750 (to be raised to £5,000 in October 2015), the creditor can petition for an individual’s bankruptcy.
While insolvency may not be punitive in the US, being taken to court will certainly incur a huge financial cost. It may take around 6 months to get to court, but once the court judgment has been awarded, it is a very powerful tool. A court judgment allows a creditor to track down the individual’s assets wherever they may be (including overseas), to seize assets to satisfy the judgment. Judgments also appear on the personal guarantor’s credit file, which is a motivating reason to pay the balance.
In the UK, the route of obtaining a court judgment may take around 6 to 8 weeks (if uncontested). The options are then bankruptcy, a charging order over assets or to instruct high court enforcement officers (bailiffs, essentially) to seize moveable assets or agree a payment plan. While the court process may be cheaper and quicker, each stage requires further court action, and it can be very expensive if contested. In the UK, it is not possible to find out from the police if a person has past convictions without that person’s consent, and it is difficult to get the UK police to deal with relatively low-value white collar crime.
So which is better? There is no better – just different. There are pros and cons to each approach. The weighting of those pros and cons will depend on your own values, your trust in the available credit information and your appetite for risk.
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