Debt collectors, it's fair to say, don't have the greatest reputation from the ground floor looking up. Abuses grew as debt buying proliferated through the recession, with unscrupulous collectors harassing people who might just owe a few hundred dollars from a trip to the doctor. Debt collection now accounts for nearly a third of the complaints to the Consumer Financial Protection Bureau.
Big companies aren't the only ones trying to collect on the bills they're owed, however. As illustrated by the campaign for a new law in New York City that would create stronger enforcement mechanisms to go after businesses that fail to pay independent contractors on time, non-payment is a problem for lots of little guys as well. The difference is, it's much easier for a debt collector to take on a long list of debts owed to one company than it is for them to scrounge for each individual bill owed to a freelancer by each individual company.
But what if you aggregated all those debts together? Couldn't a debt collector just as easily pursue a company for the money it owes its contractors?
That's the revelation that Jesse Strauss, a plaintiff-side lawyer specializing in wage-and-hour cases, had a couple years ago. "The reason why debt collectors weren’t interested in this kind of work is that it was so spread out," Strauss says. "What they want is a big account." With a hospital, say, or a cell phone provider.
Of course, independent contractors could sue to get their money, but for amounts less than a few thousand dollars, it usually wasn't worth their while to pay for an attorney. And debt collectors have something that even lawyers don't, at least until they get a court judgment: The ability to ding someone's credit score, which tends to get their attention.
"You’re going to pay the people you need to pay," Strauss says. "The folks who are going to be left unpaid are those who aren’t able to collect. And we don’t want freelancers to fall into that category anymore."
So earlier this year, Strauss set up a business called Indepayment. Here's how it works: A freelancer registers an unpaid invoice on Indepayment's website. Debt collectors sign up to take on batches of debts. If they're successful, they'll take about a third of the amount they recover, which is standard. Indepayment takes a $99 flat fee, plus a little bit of the collector's cut. "All the information from the freelancer comes to us," Strauss explains. "They put it in a form, so that the same infrastructure that was available to the large creditor is now available to the independent worker."
That streamlining function is key: Without it, a debt collector doesn't know where to start. "Let’s say they have Mr. Smith," says Lorraine Perez, CEO of a debt collection service that works with Indepayment. "Let’s say Mr. Smith is no longer with the company. So for me, who am I supposed to talk to? Nobody knows anything." With Indepayment, she'll get exactly the right contact information for the person who signed a contract with the freelancer originally.
Right now, the business is small: Strauss spends about half his time running it and half on his law practice. He's got a couple part-time helpers, and is looking to hire people who could get debtors to pay up before sending accounts to a collection agency. Strauss declines to say how many cases he's taken on so far, but says he's been able to favorably resolve about 22 percent, which is typical for debts over a year old (those that go to collection sooner have a much higher success rate).
Over time, Strauss hopes to use reports of unpaid debts to put together larger lawsuits on behalf of everybody a company might have stiffed over the years, creating a strong disincentive for businesses to make a habit of non-payment. All the information could also be consolidated into an "IndeScore," which freelancers could use to assess the risk that a potential client wouldn't pay promptly.
In New York, it may get a lot easier soon for freelancers to collect on these kinds of debts without a collector getting involved — the "Freelance isn't Free" act would empower the city to bring its own enforcement powers to bear on delinquent debtors. Strauss isn't worried about his new business, though, figuring that the problem is large enough — and his model is unique enough — that the demand for his services will only continue to grow. Besides, for the larger debts, increased penalties only create a greater incentive for lawyers to take cases funneled through Indepayment's platform.
"There’s a ton of other cases that aren’t coming to us," Strauss says. "And if New York City wants to take it on, fantastic."
UPDATE, December 12: Turns out that Indepayment isn't the only game in town. In October, a company called Freelance Collection launched using a similar model out in California, minus the batching of debts.