Credit collection

Helene Mueller
eCollect support team

Credit collection refers to the general debt recovery process of reimbursing unpaid and past-due credit loans from the consumer in debt, on behalf of the lender. Such process is normally performed by specialised DRAs (Debt Recovery Agencies), which act on lender’s behalf in exchange of an interest, which is to be requested from the creditor or from the debtor, depending on the collection agency’s terms and policy. Debt collection is directly connected to the definition for “credit” and “credit loan”. It generalises the procedure of granting a monetary loan to a consumer with a written reservation that the sum will be restored by the consumer (an individual or a business organisation) before an alluded deadline has passed. Debt recovery proceedings typically include tracing services, pre-legal phone calls, emails and letters; legal proceedings with the usage of special debt recovery solicitors in compliance with country and international government approved laws; and court process, involving small claims court procedures, wage garnishment, seizure of belongings or property, etc.

Credit collection- connotation

As positive cash flow is vital for a business, so is the debt recovery. If this operation is performed successfully, it will automatically generate positive cash flow and income in creditor’s financial system. A credit collection is preceded by a legal credit contract, serving as a law agreement between a first party (a creditor/lender) and a second party (a consumer). When the consumer falls behind with his payments, which are to be made on an agreed date, he becomes a debtor and the monetary credit amount is considered as a bad debt or a past-due late payment. Such payment falls under the definition “late”, when 30-60 days have passed. Usually the deadline is 30 days, but it can vary, depending on creditor’s policy. When there is a past-due payment on lender’s list, this is marked as a financial loss for creditor’s organisation and the debt will be written-off and transferred to a professional debt recovery agency.

Typically most creditors will try to begin a debt recovery on their own, with their private financial recourses. If the recovery is not successful, they usually hire a DCA (Debt Collection Agency) and assign the debt recovery process to private recovery agents. These agents use standardised methods and schemes for debt recovery as: pre-legal actions, preceded by tracing and tracking the debtor; legal process after the pre-legal operation; the following court actions; and continual monitoring. The last service is also considered as part of the credit collections, although it is not an active process. Monitoring is vital for corporations, as this function provides the necessary scoring of past and future debtors and measuring the possibility of new past-due payments occurrence. This process of supervision is done internally and externally as well. This means that although the creditor can carry out a monitoring within his company, using his employees; a debt recovery agency can also perform such service. It is vital also for companies, which offer commercial loans, as the scoring is very important for creditor’s future business partners and corporate borrowers.

Credit collections management

The credit collection process can also enlist a restructuring of the debt plan if the debtor is unable to cover the default payments’ requirements. In such case the subject of debt can use the so-called debt collections management. This service is provided by the creditor (if there is such department in his company); by a debt recovery agency; or by a private debt management company, which specialises only in carrying out specific and individual debt management plans for indebted subjects.

A debt recovery management carries out different debt management plans (DMPs). A DMP represents an unofficial agreement between the creditor and the indebted subject. It is based on a regular payment (most often- monthly), which the debtor is able to afford. A debt management plan is usually offered to consumers in debt, which are not in a stable financial state and cannot pay the amounts on time. The aim of such credit collection management is to help debtors gain control over their outcome without the need of further falling into debt. Another positive feature of debt recovery management plans is that when the creditor agrees to such option, further interest and fees, applicable for the debtor, are to be frozen.

When a credit collections management plan contract is to be signed, a debtor has three options for payment, depending on who offers the debt management agreement. If the creditor has his own debt recovery management department, the debtor will have to pay directly to the debtor. If a DCA provides debt management services, the subject of debt will make monthly payments to the agency, which will deduct its interest and transfer the rest to the lender. If such services are provided directly by a specialised Debt Management Organisation (DMO), then the debtor will transfer the payments to the DMO, along with its commission fees and the management company will forward the rest of the amount to the creditor.

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