Court Costs vs. Collection Rates | Mastering the Economics of Litigation in Debt Buying | Ep. 227

Adam Parks (00:08)

Hello everybody, Adam Parks here with another episode of Receivables Podcast. Today I'm here with an industry expert on the litigation and debt buying and hey, one of my best friends as well, Mr. Neil Mastalone, who's joining us from Velo Law. How you doing today, Neil?

Neil Mastellone (00:08)

you

Nice to meet you, Adam, doing very well.

Adam Parks (00:25)

I really do appreciate you coming on and sharing some insights with me. We were talking recently at one of the conferences about modeling costs, and really talking about the return on cost modeling from a litigation standpoint, and what that ultimately means for a law firm for a debt buyer in the different investment strategies. And really just the different perspectives of creditors versus debt buyers versus the law firms as you're going through that process.

So really had such an interesting conversation in person that I wanted to share that with the industry here and talk a little bit more about it. But before we jump into our core subject today, for anyone who hasn't been as lucky as me to be your friend for the last 10, 15 plus years, could you tell everyone a little bit about yourself and how you got to the seat that you're in today?

Neil Mastellone (01:07)

Certainly. Thank you, Adam. I've been in this industry now coming up on, well, coming up on 20 years. I got my start brokering debt sales on behalf of banks and debt buyers. Following that, I moved to an outfit that was buying files as principal, and we were selling through primarily an attorney purchasing network, state sales, regional sales, things like that. That marketplace became a little bit more difficult.

to work within in the early 2010, 11, 12 period. And I made a move into compliance consulting, did quite a bit of work in that space, drafting policies and procedures as well, doing some vendor auditing, developing processes for these and sort of traveling around the country, helping people to come into compliance with sort of an ever-changing landscape of regulations. After that,

I started a little debt buying company in the Southwest and we grew from a one state footprint to buying in, think it was at the height, it was about 36 states. Yeah, and managed a vendor network of agencies and attorneys and still spend some time in that space, but primarily now my time is dedicated in the business development function at Velo Law. We're a collections and creditors rights firm in Grand Rapids, Michigan. We're servicing.

a footprint in the Midwest, Michigan, Indiana, Ohio, Montana, and most recently Wisconsin. And so we're working with accounts receivable, management companies, creditors, debt buyers, and really anyone extending credit on behalf of a business.

Adam Parks (02:38)

Fantastic. And look, your experience is storied. I've had the opportunity to work with you in a number of those different locations throughout the years. So I'm very excited to have this conversation today. So really, where I wanted to kick this off was, you've got a really interesting perspective on this cost modeling and trying to understand it from the different perspectives. And I think those perspectives are mostly focused on the creditor, the debt buyer and or the law firm that is

working those accounts. Talk to me a little bit about how you see cost modeling from a litigation standpoint being viewed differently between those three marketplaces or those three disciplines.

Neil Mastellone (03:18)

Sure, right? mean, in so many situations, it's important to know who the audience is, right? I guess in this case, it's important to know who the speaker is. So, I mean, are we speaking on behalf of the credit grantor or the credit issuer where collections and collections through litigation might be a loss mitigator when this particular account is just one that we cannot bear to not collect? So, okay, we're going to invest in the litigation of this particular account. Is that the perspective?

Once that title changes hands and now this file is in the hands of a debt buyer, the perspective is drastically different. It goes from being a loss mitigator to central to the revenue generation operations of the company. And so the perspective around what is worth investing changes immensely. then the question becomes how many of these accounts can we qualify for suit?

Then if you make the move over to the vendor side, you have arrangements worked out with your client's help, presumably on payment terms of some kind, but most of the vendors are gonna be advancing their costs. And you can lay out those terms as well as you want, but ultimately you're sort of subject A to the wherewithal of your client.

Are you just the bank of Neil now and you're going to lend me costs indefinitely until such time as I start making money and I can pay you? Am I sending you every single account I have and you're going to sue great guns on it and we're going to spend the next however many years trying to recover that or are we much more target selective? As the vendor, you got to know those things about your client. You know, in addition to the terms you lay out.

Neil Mastellone (04:59)

So I think depending on what chair you're sitting in, you're viewing costs and the justifications for those costs very differently.

Adam Parks (05:06)

Fair statement. as a debt buyer, if you're a debt buying organization that has litigation in the model, you're gonna have to fund it from somewhere. And I've talked previously, and you and I have had this discussion through the years about the different layers of debt buyer funding. You have those that are doing specialty finance, you have the private family and friends money, and then you have the...

syndicated bank lines. Those that are the larger purchases are generally working through these syndicated bank lines. And when you're thinking about it from a debt buying perspective, you know, how do you view this cost modeling? Is this a is it a function of balancing the accounts that I'm going to litigate against the cost? Like, how do you view that from an investment strategy standpoint?

Neil Mastellone (05:49)

So again, I think it pays to outline the, not the speaker in this case, but the approach, right? Have I borrowed this money from one of our debt buyer financing companies or maybe I'm fortunate enough to have more conventional financing arrangements available wherein the general portfolio of the company or just sort of our pool of assets and cash flows is going to fund this core cost effort? Or am I on more of an investor, I don't want friends and family, but just

you know, investor specific model wherein the monies for this portfolio that are paid out of this portfolio must be paid back by this portfolio. If the costs and the revenues need to be segregated in that way, again, that's going to change your perspective on timing, right? Because you can go quite a bit faster if you've already got the money. I mean, don't think that that's not too surprising, right? If you've already got the cash flow coming in, you certainly can proceed much quicker.

Adam Parks (06:39)

Sure. Well, you don't have to cream the top of the portfolio in order to generate the cash flow that you need to invest in the litigation so you can focus more on your core strategy instead of having to blend strategies specific to generate cash flow.

Neil Mastellone (06:59)

Well, there's also an argument to me that you can borrow less, right? I mean, if you're if you're borrowing just the value of the portfolio and you are not financing in these court costs, you know, presumably you need more cash flow out of the gate to fund that. But if you're drawing on that existing pool, you know, you now you have a servicing obligation on that on your financing and it might make things a little bit easier for you. I mean, surprise, it's better to have more money.

Adam Parks (07:24)

Surprise, surprise. Look, from that perspective, there's multiple financing opportunities here. And sometimes the special purpose vehicle or the investments need to remain separate and are more portfolio based and other times they are blended right across a variety of portfolios or even cross collateralizing portfolios, you know, to that regard. So

I think that there's a lot to be said for that area. But as we start looking at this modeling and we start thinking about how quickly are we going to be able to move down the path, right? It's the cash flow, the timing of the cash flow and the risk associated with that cash flow. So how much cash flow can I draw from this pool? What's the timing of it based on where or how I'm funding those court costs? Do you find or have you seen

more organizations financing those core costs? Or what does that look like out in the open? I've realized that there's multiple options, but what does it really look like in reality in the marketplace?

Neil Mastellone (08:17)

So at the vendor site, think you always need the ability to finance core costs. In a perfect world, you're bringing on a lot of volume. And so you've got a lot of suits to file. And you're going to need to spend this money before you make it back. And so in that case, think it pays to have robust credit lines to be able to do that. The terms that you have worked out with your clients and...

Neil Mastellone (08:41)

diligent or what's the right way to say this, how well that's being enforced, right? Like how well they're adhering to those terms is gonna determine your comfort level with advancing those costs. If you've got everybody on 30 day terms and everybody's paying on 30 day terms, well, hey, you can sue anybody you want. ⁓ But if on the other hand, your clientele are growing debt buyers or maybe you understand their business models well enough to know that

Neil Mastellone (09:10)

You know, everybody wants all the files that can be sued, sued as quickly as possible, but not everybody can support that. Even if they want to think they can't. Right. So, so it pays, I think as, as the vendor to kind of pump the brakes periodically, especially when you have clients that, you know, periodically place a more modest amount of accounts and now all of a sudden there's a big spike. You know, good for them. They got a great, maybe they made a great deal. Maybe it's the opportunity of a lifetime, but let's make sure.

Adam Parks (09:15)

Sure.

Neil Mastellone (09:40)

that everybody knows what kind of bill you're gonna run up here as you.

Adam Parks (09:45)

Let there be no

surprise down the path. In other words, don't execute on everything before they truly understand what they're in for right if they're going to catch a $500,000 bill and they're averaging it, you know, 1500 a month, like you need to really communicate. So it sounds like the communication of the process itself and setting that expectation on behalf of the client wearing the vendor hat right like but setting that appropriate expectation on behalf to with your client.

would be mission critical. Like you need to have that in place in order to avoid the explosion of them realizing that they're out of cash.

Neil Mastellone (10:22)

Well, and I think that a lot of this can be addressed very early on in a relationship, but it just requires periodic assessment. mean, in theory, these companies are growing. The wherewithal to do this should grow with it. And that's it, right.

Adam Parks (10:27)

Sure.

But you're managing an exception, right? If you're seeing

a spike that's coming out of nowhere, you're immediately starting to assume that a lot of different things, but when you see that spike in volume, now you're concerned with, okay, this is an anomaly. This is outside of the normal course of business. Like I need to communicate.

Neil Mastellone (10:55)

Yeah. And I think just having a mechanism in place to identify larger activity coming down the pipe. then thankfully in the legal process, thankfully is a questionable, but the legal process doesn't happen overnight. Right. So we have a little bit of time to make some of these determinations. And then as well, there's no, unless you're up against statute, right, there's no law that says I must sue these people right here and right now. So perhaps it's just a matter of pacing.

Adam Parks (11:07)

Mm-hmm.

Neil Mastellone (11:20)

And then but those are all discussions that need to be had between the vendor and the and the debt buyer or the creditor. You you're not just hiring a contractor. Just go do it however you however you think it's done best. This is in theory an extension of your business that you are still responsible for managing. So, you know, I think having that collaborative relationship and a back and forth, a very candid back and forth really about costs and remits is

Adam Parks (11:32)

Mm-hmm.

Sure.

Neil Mastellone (11:49)

Not only nice to have, it's requisite.

Adam Parks (11:52)

Yeah, agreed. I think having that conversation in place is very important. Now let's think about it from a creditor perspective, the creditors got a very different hat on because they're not necessarily chasing the dollars are trying to save dollars. So I guess the question starts going down the path of how much

makes sense for the creditor? Are they willing to take the same risk levels wearing that originating creditor hat with the point of view of I'm trying to mitigate my risk versus someone who is invested in the debt buying portfolios?

Neil Mastellone (12:24)

I think that's a candid no. don't think that they would, I don't think they have nearly the incentive there to do.

Adam Parks (12:28)

like the creditors aren't going to sue everybody like we we know that

but you know how different are those two worlds

Neil Mastellone (12:35)

Well, would say they're night and day. I mean, I think on the creditor side, you're assessing like, there no way we can do this other than suing this person? And on the debt buyer side, you know, once you've run your voluntary collection efforts, it's almost as though you say to yourself, how much of this file can we qualify for sue? Right, because there's where your recovery is. So I think it's their opposites. The bank...

Adam Parks (12:54)

Okay.

Neil Mastellone (13:01)

And the debt buyer has this problem too, but the bank has it in a much more tangible way. They're also dealing with headline risk in a way that you're not. They might want to preserve a relationship with this customer. They might want them to open a checking account in the future or something like that. And so, you know, the determination has to be made. Do we want today's money or tomorrow's money? it going to be worth investing in something that is already a loss?

Adam Parks (13:07)

Mm.

That's interesting. From a creditor perspective, it is very different. And the timing of those cash flows seems to be different as well. When we're thinking about the litigation, I know I've talked with some groups that are like, sue everything, or they, the law firm is suing everything that's coming in house. And I guess have you seen a change in the balance between who's driving the decision making? Everybody's everybody these days talks about data is driving the decision.

but do you find it to be more about the debt buyer and their data or the law firm and their data that is in the driving seat of deciding which accounts to the gate?

Neil Mastellone (14:07)

So I think I got to give you a mostly answer. ⁓ Mostly I'm finding that the debt buyers themselves are doing a lot of the selection before they ever send us the account. There may be some accounts that we would qualify for litigation before they would. I mean, generally speaking, the vendor's usually willing to sue more people than you are. I mean, if you're willing to pay for it, just go sue them all.

Adam Parks (14:10)

Of course.

Fair.

Neil Mastellone (14:34)

So, you know, so that's, that's definitely something to keep in mind. I would say that the bulk of your debt buyers and the more successful ones and the ones that are going to be here year after year after year are the ones that are going to be more judicious with that cost dollar. And they're going to be the ones that are going to send you an account only because they think there's a very good chance you're going to collect it through this litigation process. And whether that's because they've identified an asset.

or they feel very good about an address and you're dealing with a person. For whatever reason, there's a sense that that is a liquidable account and not just that's an account we own.

Adam Parks (15:06)

There's something else is another an additional characteristic has been identified in the account that would lead you to believe that account will liquidate.

Neil Mastellone (15:14)

Right. And then there's a smaller portion of those, of those, customer clients that are going to send over, you know, anything that didn't collect in the more traditional collections process. Right. And then, you know, ideally you're collaborating with between the vendor and the client to say, okay, well, you know, these accounts for suit and you pull them back from that agency and send them to the law firm. And then in that case, yeah, they're suing everything to get,

Adam Parks (15:41)

It feels like the debt buyers have become significantly more sophisticated when it comes to their data management in like really the last five years. feel like prior to that, there was more of the law firms driving some of the decision making. Once you've gone through your traditional collections, we'll kick it all out to the law firm identify and whatever. But it feels like that has shifted pretty significantly in the last five years to where the debt buyers are really starting to get into the data sciences.

They're buying more data, they're appending more data, they're making decisions in advance of... that was my experience, you know, kind of being on the debt buyer side. And maybe that's because the gentleman that was running our litigation department is a data junkie, and just absolutely loved the data and was really hyper focused on what is going down each channel. Because if an account that's prime for litigation may not even go down the traditional collection channel, and we're moving the other products down the

that traditional channel to identify those opportunities to liquidate. And so there's a couple of different ways that organizations can approach these challenges. But it feels like the data has become a bigger part of it, the supplemental data, the understanding of what is within these accounts. There was a time where we would look at a whole portfolio of accounts in a spreadsheet, and you can kind of pick out some of the things that you thought high level were going.

to fall down the individual channels. But I think we've learned over the last 10 years or so that our assumptions were anecdotal at best. And now there's a data set that we can run behind it. And then there's all of these waterfalls and data vendors that we can ultimately use to supplement that data process and establish a stronger correlation between our predictions and the outcomes of the accounts themselves.

Neil Mastellone (17:28)

I would agree with that perspective completely. think a lot of it has to do with the availability and the ease of accessibility of some of this data. And I would say if you're not a data junkie, you at least need a data habit. Because I think those folks are able to put that data into use on the operations side.

Adam Parks (17:36)

Mm.

I like that.

Neil Mastellone (17:49)

that data came into use on the acquisitions piece before that file was ever purchased, right? So the determinant of what to pay for that file gets driven by that data. So naturally, mean, if you have a litigation model and you're saying, well, I want to buy this file because I believe I can sue this many people within and I believe of those people, I can collect this. The better my data is for driving that decision, the better price I can support or

maybe I see a giant red flag that I would not have otherwise seen. Right. And maybe I need to maybe I need to pump my own brakes. Right. But either way, I think that people are have command of so much more information now that we can really as the debt buyer, we can be a value add in that process. Right. It's not as it's not so much that our whole value is we own this debt. Right. So now we are

Adam Parks (18:34)

Mm-hmm.

Neil Mastellone (18:39)

if an operator between creditor and vendor, instead of just a holding place for the title to a loan, that the data is now being improved based on who owns it. We have a lot of folks in this industry that are smaller, some of them not so small, debt buyers that are themselves collection attorneys.

Adam Parks (18:52)

Mm-hmm.

Mm.

Neil Mastellone (19:03)

That's a situation where they might be as successful as they are because they were one of the first entrants into collecting this data. They were closer to the data in the first place. And now that it's more widely available, people are wildly creative when it comes to ways to around charge-offs. I've been very impressed with some of the moves people have made.

Adam Parks (19:24)

And it's operationalizing those data sets. So if we're going to try and assume or if we're going to predict which accounts we should be investing in from a court cost perspective, like if we're thinking about our return on cost from a litigation standpoint, one, I think the data needs to be included in that calculation. Like if we're talking about what is it costing us, or what's our return on investment or return on cost from a liquidation standpoint aside from

the cost of the account itself, like if you're viewing it as a debt buyer, aside from that, from what you paid for the account, right? Like that's your target, you know, for breakeven. But I feel like there's a, I feel like there's some interesting challenges here from a debt buyer perspective and really trying to understand how do you optimize this flow? And how do you ultimately predict not are you going to win in the suit? Because that's not really the equation here. The equation here is

what kind of liquidation am I going to be able to get once that judgment is in place? What am I going to, am I going to be able to find a job? Am I going to be able to find a bank account? Like what data set am I going to be able to find at that point? And then who ultimately is responsible for that part of the process? So we talked about modeling those court costs, but what about that data set on the backside? Is it the law firm that's responsible? Is it the debt buyer? And I realize it's contractual, but I'm curious to get your take on an appropriate approach to that balance.

Neil Mastellone (20:49)

Yeah. So, you know, so many times the answer is always the same thing and it comes down. Yeah, unfortunately, right. It comes down to communication. So there are those vendors who are going to very diligently move your accounts through waterfalls. You need to flesh that out as you're vetting that vendor. Where are you sending my data? When? How often? Based on what criteria? Because you might

Adam Parks (20:55)

pens.

Neil Mastellone (21:18)

You might not be as anxious as I am to get that stuff into a waterfall. Maybe you're up against your own cost constraints. Right. But that's my asset. So I need to know that it's getting to as many places as can help me identify information that will assist in the liquidation of that account, providing that I can keep that data secure. Big capital P, right? Provided I can do that.

Adam Parks (21:24)

Mm-hmm.

Mm.

Sure.

Neil Mastellone (21:42)

But I need to know that it's getting as much of that attention as it can possibly get. So if you have a relationship with your vendor wherein you feel very confident that it is hitting these vendors at these intervals and that that effort is sufficient for your purposes, then okay, you have a comfort level that a lot of people don't have. But I think what ends up happening is you end up supplementing your vendors efforts, right? There are some...

data vendors that we're all gonna use. And so if you're gonna use them, then I'm not gonna use them, because why are we gonna do double work? But there might be somebody who you don't use, just because you don't have a relationship with them, or know, for whatever reason, that I do, and that I've had some success with. So if at the end of your efforts, if you haven't found someone through your channels, well, try mine. You know, unless your relationship with the vendor is, look, we file these suits, we get you these judgments.

you want us to garnish, you got to send me employment. If you're doing all of it, well then yeah, you're going to have to set up the entire waterfall yourself. But again, you ought to be fleshing this out pretty early on.

Adam Parks (22:42)

at the beginning of the relationship, not at the end. Right? Like not once the accounts are already in place, like if you flush this all out in advance, you can set yourself up for a very successful relationship.

Neil Mastellone (22:44)

Yeah, well...

think so. I think so. think you give people a chance to honor their commitments when the conversations are more realistic.

Adam Parks (23:02)

So let me, I got one more question for you here, Neil, and it's, know, this might, this is a hard one really to answer as someone who has been on both sides of the fence, but from your perspective, what advice would you give to other debt buyers that are placing accounts with a law firm in terms of improving their return on their costs?

Neil Mastellone (23:24)

turn on their costs. Yeah.

Adam Parks (23:26)

Having lived on both sides of that equation, right? I just

I'm just curious as to what advice you would give others to go out and execute. We've talked about the differences and we've talked about the why the where and the how but like what advice would you give them to send somebody on the right path for success in this area?

Neil Mastellone (23:43)

So I think you need criteria to file a suit. You cannot say based solely on the fact that someone owes me X dollars or more, I'm going to sue you. It's inadequate. You're gonna lose. Not in the litigation matter. That strategy will not succeed. ⁓ There's gotta be a reason you think you can collect this account. I have a good address. I'm gonna get a judgment. This person is 30 years old. They can't...

Adam Parks (23:51)

Mm.

Agreed.

Okay.

Neil Mastellone (24:10)

be unemployed forever. There has to be a reason why you think this account is likable. The more reasons you get, the more confident you can be in that investment. Those reasons cost money though, right? So verifying that information can be costly. Again, if you have a vendor that you feel like is doing a lot of that work, maybe you can have them have more of a role in the suit selection. Some vendors are be excellent in that regard.

Adam Parks (24:20)

Mm-hmm.

Mm-hmm.

Neil Mastellone (24:38)

You're going

to find that there are some people that are your right hand when it comes to who to sue and when. Ultimately though, and I say this as both the debt buyer and the representative of the vendor, as debt buyer, that is your asset. So ultimately, the only person who's really going to be upset if that account doesn't collect is you. So you've got to be driving the bus on information. If your vendor is unable to liquidate an account,

If they're doing everything right, right? They're following the steps they always follow. Yeah, you may need to get in there. Ultimately, this is your investment dollar. This is your asset. You can manage very talented vendors and you can manage them through very diligent processes, but unexpected things happen. Exceptions pop up all the time. We have whole reports for them. So.

Adam Parks (25:28)

True statement.

Neil Mastellone (25:30)

Right? you know, ultimately at the end of the day, this is your asset. So you'll have to drive the bus, but hopefully, you know, hopefully you can rely on your people.

the overwhelming majority of the time that you won't have to get Tutu involved too often.

Adam Parks (25:44)

That is some great advice, Neil. I really do appreciate you coming on and sharing your insights with me today. I always do enjoy a chance to catch up with my friend and former business partner and just someone that I came into the industry with. So I really do appreciate continuing to learn from you just like I did from day one. And thank you for coming on and sharing again today. For those of you that are watching, if you have additional questions you'd like to ask Neil or myself, you can leave those on LinkedIn and YouTube and we'll be responding to those.

or if you have additional topics you'd like to see us discuss as someone who has sat on multiple sides of the equation here. Always happy to have Neil continue to come back and help us continue to create great content for a great industry. But Neil, thank you again for all of your time and attention today. I really appreciate your insights.

Neil Mastellone (26:27)

was my pleasure. Thank you for having me.

Adam Parks (26:29)

And thank you everybody for watching. We'll see you all again soon. Bye everyone.