The Three Key Challenges of International Debt Collection

Right now, there is a debate raging in the United States about whether or not debt collectors should be limited in the interest rates that they are allowed to charge. The debate was ignited by a 2015 court case that was heard by the U.S. Court of Appeals for the Second Circuit. The case (Madden v. Midland Funding, LLC.) involved a financial company that bought the plaintiff's credit card debt. When the debt buyer (Midland Funding) tried to collect the plaintiff's debt, the company attempted to charge a 27% interest rate.

The borrower, Saliha Madden, took Midland Funding to court, arguing that the firm was breaking usury laws by exceeding the 25% interest rate cap of New York, her home state. The Second Circuit ruled in favour of the plaintiff, a decision that could have far-reaching effects for the debt collection and debt buying industries.

Midland Funding has sought a second opinion from the Supreme Court, but SCOTUS declined to hear the case. As a result, the burden of making a decision in the case now falls on the Executive Branch. If President Obama sides with the Second Circuit, his decision will make debt collection in the U.S. arguably more complex than it has ever been before. However, while the rules of collecting debt across state lines have just come into the headlines recently, the process of collecting debt across international lines has always been complicated.

Understanding the Hurdles of International Debt Collection

Much of the coverage around this recent debt collection debate has exclusively portrayed the consumer point of view. The idea is that creditors should be capped in the interest rates they can charge because that outcome is fairer to the debtors.

While debt collectors and creditors in general are frequently portrayed in the media as enemies, the view changes if you are on the business side of things. Doing business in the U.S. and taking on the role of creditor is now more complicated because of the nation's emphasis on usury laws. The U.S. is not alone in its priorities, and you have to be careful about how you do business abroad largely because debt collection processes can become extremely convoluted.

If you plan to do business overseas and may play the role of creditor for foreign companies, clients, or partners, here are three challenges to keep in mind:
  1. Courts operate differently in different countries
In December 2014, credit insurance company Euler Hermes published a white paper report titled, "
." The report examined the challenges of international debt collection. One of the segments of the white paper covered "The five commandments of international debt collection," with rule number one being to "never underestimate the business context." That section included stats from a 2014 World Bank survey which ranked 189 countries from best to worst in "Ease of doing business" and "Ease of resolving insolvency."
These two charts send a very clear message: how easy it is to do business internationally can change significantly depending on which country you are in. One of the reasons for that is the courts. If you need to take a debtor to court to collect on a debt or resolve an insolvency issue, some countries (Japan, Germany, etc.) have legal systems that will make the process simple and painless. Others (India and Saudi Arabia, for example) have courts that won't be so helpful, whether due to complicated procedures or corruption.
  1. There aren't always regulations there to help you
In the current U.S. debate over debt collection interest rates, representatives of the financial sectors are arguing that usury laws and interest rate caps will strangle debt collectors and, by extension, the entire finance industry.
, there have even been murmurings that limiting how much interest debt collectors charge will "wreak havoc" on consumer lending, from student loans to credit cards.

Josh Foreman of InDebted, a debt collection technology startup based in Australia disagrees. "The days of charging exorbitant interest rates are over. Companies like ours focus on leveraging emerging technologies to drive cost efficiencies, meaning there is no need to add additional interest onto the debt".

However, that doesn't mean you should be looking for a country with
debt collection regulations if you decide to do business internationally. Some regulations--like laws that define when a payment is officially considered "late"--are important to give creditors leverage in debt collection situations. Outlining strict contracts in these countries can help you to set deadlines and payment terms of your own volition. However, if you are doing business in a country without a fair, timely, or otherwise reasonable court system, you will still have trouble getting your contract enforced.
  1. Insolvent debtors are a ticking time bomb
There is a reason that the "Ease of resolving insolvency" chart in the Euler Holmes white paper is so important. When a debtor runs out of money, your chances of collecting the full debt you are owed (plus interest) drop to close to zero. However, in the U.S., you can still rely on insolvency and liquidation of debtor assets as a means to collect some of your owed debt. In some foreign countries--particularly in the ones with less organised court systems--the insolvency process is unsurprisingly complex and frustrating.

Furthermore, if your debtor owed tax debts to a government or any debts to a bank, those creditors will be paid first as assets are liquidated, often leaving little or no money left for you to collect. While this fact is also true in the U.S., American creditors also have the option of pushing debtors to restructure their companies and continue operating. This restructuring process brings its own complications but is still sometimes preferable to insolvency if you want to collect as much debt as possible.


Based on these hurdles, companies hoping to do business overseas should look for countries with reasonable court systems, sufficient regulations for debt and debt collection, and the option for insolvency restructuring. Should your business take on a creditor role for a foreign company or client, the features of a country's infrastructure will give you a means of settling debts if and when you need to collect.