By Isaiah Opiyo
Have you ever tried to understand why your debtors don’t pay you whilst they pay other creditors? It all relates to understanding the psychology of a debtor. Let me give you a scenario to illustrate the psychology of a typical debtor. Take a scenario where it is the end of the month and you only have Ksh.30,000 left. Meanwhile you owe your neighbor the same amount of cash and you also have rent arrears of a similar amountto repay your landlord.
Given that you only have Ksh.30,000 left, between your landlord and your neighbor who would you pay? Your guess is as good as mine. You will certainly pay your landlord over your neighbor. Let us change the scenario slightly. Assuming that you only owe your landlord rent arrears of the same amount and you still have a court fine of Ksh.30,000 to pay. With only the Ksh.30,000 left, between the court fine and your landlord, who would you pay?
Interestingly, you will pay the court fine over your landlord. Looking at the two scenarios, you will realize that your priority in payment changes depending on the consequences of your action of not repaying. In the first scenario, the consequence of not repaying your landlord is higher than that of your neighbor.
By repaying the neighbor over your landlord, it will mean that you get kicked out by your landlord into the
cold. Comparatively, failure to pay your neighbor will only mean that your cordial relationship as neighbors will worsen. This is not worse than being kicked out of your house into the cold with your family. However when it comes to the second scenario, you find that the consequences of defaulting on your court fines are dire compared to being thrown out of your house for failing to repay the rent arrears owed to your landlord. This explains why you opt to repay the court fine over rent arrears.
The two scenarios illustrate the various aspects regarding the psychology of a typical debtor. First, it points out that every debtor has limited resources that cannot sufficiently cover their entire debt obligations. This implies that only few debt obligations will be repaid whilst the rest will remain unpaid. Secondly, the two scenarios reveal that every debtor has a priority list when it comes to repayment.
Only those who make it to the top within the priority list of the debtor get paid. For instance within the first scenario, the landlord arrears get into the top list over the debt owed to the neighbor. That is why the landlord arrears is paid whilst the neighbor debt is ignored. Interestingly, when it gets to the second scenario, the court fine comes top over of the landlord arrears. If the three debt obligations are arranged, court fine will rank first, followed by rent arrears and lastly the debt owed to the neighbor.
It is only after clearing the court fine that the rent arrears will be paid. The same applies that the neighbor’s debt will only be repaid after the rent arrears have been settled. This begs the question: how does a creditor interested in being repaid make it top within the debtor’s priority list to get repaid? The fact that you haven’t been repaid shows you rank bottom in the priority list of the debtor.
To rank top within the debtor’s priority list, there must be consequences attached to failure or defaulting on a particular debt. Any debt that has no consequences will never be ranked and subsequently will never be repaid. Sometimes the consequences may be there but aren’t relatively severe when compared with of other debt obligations.
That is why some creditors hire the services of auctioneers to collect their debts. The only difference between collecting the debt directly and hiring the services of auctioneer services is that the latter puts a lot of pressure when pursuing the debt. Failure to repay the debt will invite auctioning of properties as a consequence.
To rank top within the debtor’s priority list, there must be consequences attached to failure or defaulting on a particular debt. Any debt that has no consequences will never be ranked and subsequently will never be repaid. Sometimes the consequences may be there but aren’t relatively severe when compared with those of other debt obligations.
The consequences of defaulting on a debt are myriad and range from demand notice and letters, stopping further supplies and services, legal suits, locking of premises, attaching of assets, auctioning of properties as well as being reported to the credit reference bureaus for defaults. There are debtors who will prioritize to repay when they get the demand letters or notice from creditors to pay. Others will ignore the demand letters and only repay when the suppliers stop further supplies subject to debt repayment.
Some debtors will repay when they got a final notice of being reported to the credit reference bureaus for defaults. This explains why saccos and other trade credit providers have been able to recover their debts upon serving a public notice of sharing credit information with credit bureaus. Even with the sharing of credit information with credit bureaus, there are serial defaulters who are adamant and will not yield to that.
With such notices, they will not bother to repay the debt. Interestingly you will be shocked that such debtors will yield to landlords locking their doors for failure to repay the debt. To understand what works, it is imperative to understand the credit history of your customers before offering them credit.
Those with bad history of non-repayment will not repay when you stop their supplies. Instead they will source the supplies from other competing suppliers and evade repaying the debts. Those with good repayment history will repay when they get a demand notice or the notice for listing with the credit bureaus. This explains why it is easier to collect debts from first time defaulters than serial defaulters.
Profiling your customers before extending them credit will not only allow you to know the financial ability of your customers but will enable you to understand how to make it to the top of your debtor’s priority list when pursuing outstanding debt.
