Debt Collection

What is debt collection?

Debt collection occurs when a collection agency or company attempts to collect an unpaid debt from an overdue borrower. In many instances, third parties, like collection agencies and debt buyers, are the ones who try to recover the borrowed funds. Debt collectors pursue different types of debts, including credit cards, rent payments, medical bills, phone bills, and car payments. Non-payment can result in legal actions, repossession, asset seizures, and negative credit score hits. 

Many lenders use loan servicing software to automate and manage the loan lifecycle. Loan servicing software helps lenders increase revenue, improve customer satisfaction, and reduce operating expenses due to workflow efficiencies. Loan servicing tools make it easy to collect and import loan data, manage multiple borrower accounts, and manage payment processing and collections. 

What is the Fair Debt Collection Practices Act (FDCPA)?

The Fair Debt Collection Practices Act (FDCPA) is a federal law in the United States that regulates how debt collectors are permitted to attempt to collect certain types of debt. The Federal Trade Commission (FTC) is the primary enforcement for the FDCPA. It is essential to understand the law and how it works when dealing with debt collections. 

The FDCPA protects consumers from deceptive, abusive, and unfair practices as part of the debt collection process, primarily with regard to personal, family, and household debts. Under the FDCPA, debt collectors can’t communicate with consumers at unusual or inconvenient times or locations. Collectors must cease communications if a consumer refuses, in writing, to pay a debt or requests that the debt collector stop communication. Additionally, there are regulations around third-party communications and validation of debts that collectors must follow.

Harassment, misleading representation, and unfair practices are prohibited under the FDCPA. Some examples of tactics under these categories include pretending to be law enforcement, lying about the debt in any way, and threatening to arrest the consumer. 

Types of debt collection

Lenders sell unpaid debts to collection agencies for various types of overdue funds. Some of the common types of debt that go to collections include the following.

• Credit card debt: Credit card companies may send unpaid balances on credit cards to collections if the borrower falls delinquent. Collection activities include letters requesting immediate payment and collection calls.

• Personal loans: Individuals may take out personal loans from banks and financial institutions for varying purposes, but if the borrower fails to pay their loans, the loan issuer can send them to collections. 

• Student loans: When borrowers default on private and federal student loans, the loans go to collections. Federal student loan default can result in garnished wages, tax refunds, and social security checks.

• Car loans: When a lender no longer believes an individual will repay a car loan, they may sell it to a collection agency. A car loan that goes to collections can lead to repossession of the vehicle. 

• Medical bills: Unexpected medical bills are costly. If an individual can’t pay their medical bills, the provider can sell the debt to collections. Medical bills in collections can negatively impact credit scores and make it challenging to secure loans in the future. 

• Bills for services: Unpaid utility (electricity, water, or gas) and cell phone bills may go to collections. Service providers may shut off accounts and access to services when these bills go unpaid for extended periods. 

How does debt collection work?

The debt collection process varies based on the lender or company collecting the debt. In general, the following series of steps occur in an attempt to recover money owed by individuals or businesses. 

• Missed payments: The debtor fails to make timely payments, and the account becomes delinquent. The number of missed payments or overdue amounts that trigger collections depends on the company’s policies and type of debt.

• Debt goes to internal collections (when applicable): A creditor’s internal collections department (if they have one) may attempt to collect payment first. Activities at this stage include sending email reminders and formal notices, making contact via phone, and discussing payment arrangements to recover funds.

• Collection agency sale: If a company doesn’t have an internal collections department, or if internal collections attempts aren’t effective, the lender may sell the debt to a third-party collection agency. The collection agency sends letters reached out by phone or initiates contact through another method to secure repayment. 

• Verification, negotiation, and settlement: Debtors can request verification of the debt after initial contact. Upon verification, debtors and collection agencies may negotiate to settle the debt for a reduced amount or by setting up a longer-term payment plan to work with the debtor’s financial situation. 

• Recovery or write-off: The collection agency receives payment if a debt is repaid. If an internal collections team or a third-party collection agency can’t collect the debt, the creditor writes it off as a loss. 

Businesses use dunning to receive timely payments from consumers. Balance the fine line between informing consumers and nagging them unnecessarily.