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Why Nonprofits Should Be in the Debt Collection Business

NEW YORK (TheStreet) -- Nonprofit organizations are wonderful things. They do fabulous work to uplift and advocate for the less fortunate, fill their bellies and their souls and offer shelter when none is available. Nonprofits may be secular or religious but seek equally to improve quality of life for those for whom quality of life is low.

Thirty-nine million of our fellow citizens in debt, and debt collectors make billions of phone calls intended to annoy, embarrass and abuse them into giving up the rent money or even money for food to take care of that credit card debt or payday loan or unpaid medical bill. Debt collectors file 10 million lawsuits a year. Contrary to common belief, these debts almost always were not the result of poor decisions. Largely they are the result of a lost job or an illness in the family.

Those two activities -- doing good for society and collecting debt -- are poles apart, yet they really fit hand in glove. Nonprofits are in the business of helping people who need help, and consumers overwhelmed by debt certainly need lots of help but have no choices other than to just hunker down and struggle on.

At first blush, no nonprofit would say they wanted to become a debt collector and no debt collector would behave like a nonprofit. What changes this dynamic is an idea that opens a door for nonprofits to see themselves able to magnify their efforts and extend their outreach in ways not before possible. For every nonprofit, the limiting factor is not a shortage of people who need their help -- it is a lack of funding to meet those needs.

Both needs are solvable in a way that does not create a social welfare or giveaway program nor create a tax burden for government.

I have made proposals to the administration and consumer advocacy groups for the creation of a special tax credit program that would give banks incentives for donating delinquent consumer loans to nonprofit organizations. Those donated loans become the source of funding for expanding the programs and outreach for the nonprofit.

The nonprofits, operating under special rules and qualifications, would work with the consumer to restructure loans into payment terms that would truly fit the consumer's specific situation and generate a cash flow that the nonprofit uses to fund broader service needs. This new revenue source will allow nonprofits to extend their reach farther and faster.

Money corrupts. Even nonprofits can be corrupted. But controls would be in place to prevent these special nonprofits from growing into a different type of voracious and abusive debt collector that was merely exempt from paying taxes. The nonprofit is required to provide a range of financial literacy, social services and job search programs to the consumer with the delinquent loan. The nonprofit is forbidden to charge interest or to use any form of litigation against a consumer. The incentives are balanced in such a way that the consumer and the nonprofit, without friction, meet in the middle with a solution that allows the consumer to get back on their feet and allows the nonprofit to do good things for more people in more ways.

The further genius of this special tax credit is that there are so many winners. The banks win because of the tax credit. The consumers win because they get out from under an impossible debt overhang. The nonprofits win because they have more resources to fulfill their core mission. The government wins because unemployment is reduced and the attendant cost of unemployment compensation and food stamps falls by billions of dollars. Our courts win because the rate of bankruptcy is cut in half and the number of debt collection lawsuits falls by 80%.

There is only one loser in this process: the traditional debt collector and the lawyers who work for them. None of us are going to lose much sleep over that outcome.

Bill Bartmann is the CEO of debt advisory firm, Bartmann Enterprises, and the CEO of CFS II, a debt collection company. Bartmann is the author of Bailout Riches! How Everyday Investors Can Make a Fortune Buying Bad Loans for Pennies on the Dollar. His recently published book, Out of Control: Cases of Debt-Collection Abuse in America and What We Can Do About It, documents clear patterns of abusive tactics used by unethical collectors.

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