Bad debt collection

Helene Mueller
eCollect support team

Collection of bad debt referres to the whole recovery process of default payments and past-due debts, marked by the creditor as uncollectible. It is described as an attempt to secure a full payment from the debtor on behalf of the original creditor. Debt recovery can be carried out either by a licensed DCA (Debt Collection Agency) or by a financial subdivision within creditor’s corporation. Debt collection is considered as an income and potential profit for the creditor. The same applies, when the lender sells his “charged-off” debts. Here the original creditor can chose to sell his default profiles to different debt buyers and receives a fraction of the debt sum. Default collection process consists of various and sophisticated strategies developed specially for collecting overdue payments, which ensure legal and ethical debt recovery. Debt recovery can be performed by first-party, third-party DCAs or by debt buyers. First-party debt recovery is carried out in creditor’s company. Third-party DCAs are private debt recovery organisations, acting on behalf of the original creditor. Debt buyers can also perform recovery of bad debts but on behalf of their own company, as they aim to buy default profiles from the original creditor. Debt purchasers pay the original lender a percentage of debt’s amount. Then they can start the collection process or re-sell the delinquent profiles to another smaller debt buyer.

Methods of recovery

Bad debt Collection agencies use different methods in order to perform successful recovery approach and contact the debtors. After tracking the subject of debt, DCAs continue with contacting the consumer using multichannel communication and start chasing the late payments. All services before the legal process are called pre-legal actions, also known as pre-action procedures. The whole process aims to settle the debt without interference of legal or court proceedings.

After the pre-legal actions, legal process will follow and after that- court actions. Legal proceedings include hiring professional debt collection solicitors and attorneys. They can either forcefully seize debtor’s belongings/property or offer different payment plans, including an optional Individual Voluntary Arrangement (IVA) for individual debts, and Company Voluntary Arrangement (CVA) for commercial debts. An IVA is used if the debtor (an individual or a business) does not possess sufficient funds to settle the full debt amount. Both creditor and debtor can benefit from such agreement, as it represents lawfully legal contract and provides further security for the lender and for the subject of debt as well. It is also used when a debtor wants to avoid placing state of bankruptcy. Individual Voluntary Arrangements and CVAs are most commonly used in UK & Wales, Scotland and Ireland.

Another default collection approach method is sending official statutory demand letters and letters before action. Generally they aim to inform the subject of debt that if he does not settle the outstanding amount until a specific date, court actions will take place. In such letters is also included the total debt sum and all additional expenses and fees, deriving from debtor’s late payments.

Court actions contain different small claim courts procedures. Generally bad debt recovery court proceedings consist of relocating the debt case from a DCA to legal court. The debtor will then be contacted by court representatives. He will also receive official letter including a specific date on which the subject of debt has to appear in court and file his defend.

Validation & authorisation of bad debt collection

Bad debt Collection complies with different state and country laws, which determine DCAs’ validity and control their actions. Different acts regulate debt collection agencies’ behaviour, such as the FDCPA- Fair Debt Collection Practices Act for US, the OFT- Office of Fair Trading for UK; the Code of Civil Procedure, also known as “Rules for Civil Procedure” (Zivilprozessordnung), and the Tribunal for Commercial Matters, both valid for Germany; Alabama Debt Collection Laws; Hawaii Debt Collection Laws (ext. link 6); the European Order for Payment Procedure; the Late Payment of Commercial Debts Act for business debtors; etc.

There are also legal points, which regulate recovery companies’ actions and determine when a collection agency is considered as licensed to operate as such. According to the FDCPA, the Fair Debt Collection Practices Act, an organisation, which recovers its own debts under the same company’s name is not recognised as a legal debt collection agency. However, it can still legally collect its own debts but it is not allowed to charge the debtor a collection fee or an interest. The same is valid according to the laws in GSA area (Germany, Switzerland, Austria) and also for UK, Scotland, North Ireland, etc.

Used literature & external links