Debt collection lawsuits and payment plans

TL/DR https://lbird.pythonanywhere.com is a website that will let you figure out a suggested weekly repayment amount based on a debt owed and the interest rate. This suggestion does not require any information about a consumer’s ability to pay.??

When I walk into the courtroom to observe debt collection cases in action, one of the first things I notice is that in most courts, defendants (typically not represented by a lawyer) are usually sent to negotiate with a debt collector before they communicate with a judge. And these communications quickly turn into negotiating a payment plan for the debt they are being sued over. On one side of these negotiations is a lawyer who does this work every single day, on the other side a person, often visibly nervous or frustrated who likely doesn’t do this sort of thing every day. These negotiations are usually centered around how much can a person afford to pay each week or each month to pay back the debt. But little discussion occurs about what an appropriate payment for a person looks like. Doing the rough math during these observations in debt collection courts across the country, I’ve seen people agree to payment plans that would likely see them never pay more than the interest on a debt and not chip into the underlying debt. Alternatively, I’ve seen people agree to payments that may be more onerous than a wage garnishment would be and though clearing this debt faster, could lead to further financial complications down the line as they’re spending too much of their income on clearing this debt, potentially squeezing other areas of their budget.?

Of course, paying off a debt quickly is the best way to stop having a debt. But that is not a practical reality for many families with competing budget priorities like housing, transportation, food, and medical costs. So I created a methodology that neutral observers with zero knowledge of a person’s financial circumstances can use to try and find out the ideal repayment plan for a debt.??

Without knowing anything about a person’s ability to pay, this solution suggests a payment plan that balances paying down a debt quickly enough to pay it off in a reasonable timeframe while balancing paying off too much at a time which could have impact on a person’s ability to afford the rest of their life. Here’s how I did it and here is how it could be used to help people with consumer debts they’re struggling to pay back.??

Methodology for a payment plan without consumer financial information available ??

Building a payment plan calculator is straightforward if you know the amount owed, interest rate, and what a weekly or monthly repayment could look like. Using the NPER function in Excel, I initially built out repayment tables looking at $5 increments of repayment per week (starting at $5 per week and moving up in $5 increments to $500/week) to highlight what a repayment could look like for a person. For example, if you paid $5 per week, how long will it take to pay back a debt and interest? Or if you pay back $200 per week, how long will it take? Interestingly, when you chart the repayment, you see a curve where the y value of how many weeks it will take to pay off a debt quickly drops as you move along the x axis of how much is being repaid. This curve always has an elbow where the slope transitions quickly from less than -1 to greater than -1. I look at the elbow as the inflection point where a person goes from not paying enough to repaying too much. Or the sweet spot.??

Consumer debts in court are often around $1,600 so I used that amount as a starting point. Using the example in figure 1 ($1,600 debt, 8% interest), you can see that a person paying just $5 per week is going to take almost 450 weeks to repay the debt they owe, paying $600 in interest during the repayment. Alternatively, as you pay more than $50/week the slope of the curve remains relatively flat, and the weekly repayments start to cluster much closer together. This suggests that you may not need to pay that much each week to still pay this debt off in a reasonable time frame.??

After talking to a researcher friend (shoutout David McNeill ), he suggested using a best power fit curve, taking the first derivative, then solving for x=-1 as an ideal way to calculate the ideal repayment spot on the curve. I would never have figured this out if it wasn’t for him. Looking at the chart above, adding a best power fit trendline and having Excel show the formula, I get Y=2003.6x^-1.044. Taking the first derivative (thanks google) and solving for x (thanks chatgpt), I get a value of 42.12. I’m using this as the ideal amount of weeks it takes to repay the debt. Looking at a repayment table (see table 1 below), 42.12 weeks roughly translates to slightly less than $40 per week.??

But there is a slight problem: I couldn’t figure out how to do this math dynamically in Excel in a way that would allow for changing inputs such as amount owed or interest rate. So I hacked together a different solution that approximates this method very loosely.??

To calculate the repayment value, I hacked up a creative solution to build a function to measure the slope of a line drawn between the point before the increment I was measuring and the point after the increment I was measuring. In more plain terms, if I was looking at a $15/wk repayment, I calculated the slope of a line from $10 to $20 and output this next to the $15 increment. From here, I have a rough numerical representation of the slope. And looking at the slopes, the inflection point in the curve occurs when the slope is greater than negative one. Here is a table using the example above and my slope calculations.??

In Excel, I then created a calculator, asking for the amount owed and interest rate, that would then calculate out the ideal repayment amount, weeks to repay, and interest paid.

Results for $1,600 debt, 8% interest?

Best weekly repayment: $45.00??

How long to payback??37 weeks?

Total interest paid?$46.69??

Changing the inputs to $3,000 owed and 6% interest, we get a best weekly repayment of $60 resulting in paying down the debt in exactly 52 weeks with $91.80 in interest paid. Increasing the debt to $10,000 and a 6% interest, we get an ideal repayment of $110 per week for 96 weeks paying $570.40 in interest. Before you comment that those repayments are too much or too little, again this calculator is trying to make a prediction without any known information about a consumer and their ability to repay. I’m trying to strike the balance between paying off a debt quickly without unnecessary impact on the rest of a family budget. Please keep that in mind. ?

Making a tool you can use quickly?

Practically, Excel is fine to model something out but it’s not realistic to expect anyone to use during a negotiation. So I took my work from Excel and created a python program to take an input of amount owed and interest rate and used that to output a suggested repayment amount. But running python is probably less realistic to expect someone to use than Excel. So I quickly figured out how to use Flask with my python script and found a website where I could host it (shoutout pythonanywhere).??

If you go to https://lbird.pythonanywhere.com you will see I built a site where you can enter the amount owed, interest rate, and what you want to pay each week and see how long it will take you to repay a debt at your desired repayment as well as a suggested repayment amount that calculates the sweet spot on the repayment curve.??

I am still working on error handling so if you enter a repayment amount that won’t pay back the debt fast enough you will get an error page. It’s on the list of things to eventually handle better.??

Where you readers of this post come in??

This is where you come in, does this method work for you? Any suggested tweaks? How about the website, any suggested improvements????

If you want the code, I’m more than happy to share it with you if you dm me. Also, feel free to use my site in your work if it’s helpful.??

Disclaimer??

This post is about a side project of mine and the ideas represented in here are not endorsed as an approach by my employer though they are heavily informed by my work in courts and debt collection. The work I’ve done has also not been verified by financial researchers. This post is hoping to spark a conversation about if this method is an appropriate method for calculating a repayment plan for a person where you don’t know any information about their ability to pay. Be kind in your criticisms.

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