Recovery Rate

Factors That Influence Recovery Rates

Recovery rates on charged-off consumer portfolios depend on several interconnected factors:

• Age since charge-off. Fresher accounts generally have higher recovery rates because borrower contact information is more current and the obligation is more recent in the debtor's memory.
• Account type. Different receivable types have different recovery profiles. Credit card charge-offs, installment loan defaults, and deficiency balances each respond differently to collection strategies.
• Documentation quality. Complete documentation (original agreements, account statements, chain of title) supports legal enforcement and increases recovery potential.
• Balance size. Larger balances may justify more intensive collection efforts, including legal action, while smaller balances may be uneconomical to pursue individually.
• Geographic concentration. Recovery rates vary by province based on court costs, limitation periods, and local economic conditions.

Recovery Rate and Portfolio Pricing

The buyer's projected recovery rate is the most important input in the pricing model. The buyer estimates total expected collections over the life of the portfolio, subtracts projected collection costs, and discounts the net cash flows to present value to arrive at a bid price. Even small changes in recovery rate assumptions can significantly affect the bid.

Buyers build recovery models using their own historical performance data on similar portfolios, data tape analysis, and market benchmarks. Experienced buyers continuously refine their models as they acquire and work more portfolios, improving the accuracy of their projections over time.

Measuring Recovery Performance

After acquiring a portfolio, buyers track actual recovery against their projections using metrics such as cumulative recovery as a percentage of face value, monthly collection rates, cost per dollar collected, and return on investment. These metrics inform future bidding and help the buyer identify which account segments and collection strategies produce the best results. Consistent performance tracking is essential for building a sustainable portfolio acquisition business.