Will Government Debt Collectors Get Paid in a Federal Debt Default?

Thousands of businesses that contract with the government are at risk of seeing their business operations come to a halt if federal lawmakers don’t raise the debt ceiling by the August 2 deadline. But private debt collection agencies likely would fare better if the government had to choose which firms to keep doing business with because collection agencies are net revenue generators.

Though much of the nation doesn’t like the eleventh hour deal announced Sunday that President Obama reached with House and Senate leaders to raise the debt ceiling, many are hopeful it will garner enough votes to lift the debt ceiling so that the nation can borrow what it needs to pay its bills.

If lawmakers reject the deal, no one knows who the U.S. Department of Treasury will choose to pay and continue doing business with in the short term. The same would be true of state and local municipalities, which also will have to prioritize payments.

But Bruce Cummings, CEO of government-focused collection agency Gila Corp., expects that government agencies that contract with private debt collectors will continue their contracts because they will need the revenue that the agencies collect.

“They will want to keep in place anyone collecting revenue because they want to continue to receive the revenues,” said Cummings, whose firm contracts mostly with state and local municipal government agencies.

Of course debt collection will be even harder if the money the government pumps into the economy is cut by more than 50 percent. But some revenue is better than no revenue during an economic crisis.

One thing that’s not so certain is whether payments to private collection agencies would change if the government has to prioritize its payments. Cummings said net fee contractors are better positioned to receive uninterrupted payments because they collect the revenue and deduct their fees before sending the balance to government agencies. However, gross fee contractors typically submit an invoice for payment.

Cummings said he thinks that collection agencies working under gross term contracts could experience some delay in getting paid.

“If it’s a gross contract, typically a delay may extend out 60 days or longer,” he said. But Cummings added that collection agencies are such an important component to revenue generation when dealing with an economic slowdown that government agencies would want to pay them as quickly as possible.

The private debt collection agencies under contract with the U.S. Department of Education work under a gross fee contract. Payments towards student loans are sent to the government, which pays the 22 agencies after it tallies how much has been collected.

A spokesman for the education department told insideARM.com that he did not know how the agencies’ payments for service would be affected if the Treasury Department had to prioritize payments.

“Unfortunately, we just don’t have answers at this point in time,” he said. “We continue to coordinate with the Department of the Treasury and remain hopeful that Congress will reach a deal.”

Even though government-contracted collection agencies will likely continue to work, some may still be at risk of financial catastrophe. Some, if not all, of the collection agencies that contract with the education department invested in government mandated security and software systems before they began collecting on the current ED contract, which started in October 2009. At the time, one contractor estimated it would take ED contractors as much as 24 months to break even on the five year contract. That makes what’s happening with federal lawmakers and the debt ceiling a bit daunting for them.

“It’s a new path for us,” said Chris Van Dellen, president of Collection Technology Inc., one of the education department’s small business contractors. “I’ve never seen this happen before and I don’t know the outcome.”