Debt collection process

Helene Mueller
eCollect support team

A debt collection process is a cumulative concept for the fair and ethical recovery of delinquent amounts and past-due payments from an indebted subject on behalf of the creditor. Usually the lender either collects the amount on his own, or hires a private recovery agency to represent him as a third-party in front of the debtor. If a collection agency is involved, the whole debt recovery process falls under the name interlocutory debt collections process. It can be performed within one country (local debt recovery) or on a transnational level (international debt collection). The collection operation’s scope depends on debtor’s permanent location. If the consumer inhabits the same country, where the creditor’s company is based in, the recovery operation is local debt recovery process and will be performed in accordance with local and native acts and laws. If the debtor lives in a country different than creditor’s company occupation, the process will be carried out on an international level, and the debt recovery agency and the lender will have to comply not only with local laws, but also with nationwide regulations.

Debt collection process and recovery of bad debt

Bad debt derives from situation, where a consumer has fallen behind with his regular loan payments towards the lender. After bad debt profile occurs, the creditor will usually try to collect the amounts on his own, using internal debt collections process. This process is carried out by lender’s employers, who are part of lender’s organisation. If the operation does not produce success and positive income, the creditor will mark the delinquent profiles as written-off debts and resort to the professional services of a private DCA, i.e. Debt Collection Agency. Usually the period after which a DCA is involved in the debt collection process is from 3-6 months, but it depends on creditor’s policy and personal decision. In U.S. a creditor will mark a debt as a charged-off (uncollectible or difficult to recover) when past-due debts become 180-days old, considered from the day of signing the contract between him and the consumer. As unpaid invoices and written-off debts may have serious consequences upon creditor’s business and cash flow, most lenders prefer to hire a recovery agency as soon as possible.

After the lender transfer the debt cases to the DCA and the agency integrates its debt collection software (API- Application Programming Interface), an exchange of data between creditor and collection agency begins. The next step from the debt collection process is contacting the debtor. A debt recovery agency typically uses standardised methods of collection, which aim to not harass the debtor and not breach his/her rights as a consumer. While getting in touch with the debtor, the debt recovery agency applies as creditor’s interlocutor in front of the consumer.

Interlocutory debt collection process services can also be performed by a debt collection solicitor or legal attorney, who will act on behalf of the debt recovery agency, which has been hired by the original creditor. Such legal representatives not only send official letters of demand and letters before action, but can also transfer debtor’s case to court, issue and force different court orders: a writ of summons; request for a small claims procedure document; high court enforcement orders; property confiscation court authorisation; wage garnishment (also called EAO, i.e. Emolument Attachment Order, according to laws in Republic of South Africa), etc. When the default profile has been sent to court, the debt recovery attorney will dispatch one last letter to the debtor, informing him that court actions have begun and from a specific date the indebted subject will be summoned to court to present his defend.

Every debt recovery agency has to reckon with different laws and take into consideration country and state acts for a fair debt recovery process. Although national and international regulations vary depending on debtor’s place of abode, there are standard and universally accepted legal and ethical practices in order a legitimate debt collection process to be carried out. It is of no importance whether the debt collector is a creditor, a private debt recovery agency, a first-party DCA, a debt buyer or an independent debt recovery attorney; there are collection rules, which are valid for all collection agents.

The first statute in a fair debt collection process is protection of debtor’s personal data and information, and utilisation of non-harassing debt recovery methods. The manner of pre-legal actions, legal proceedings and court operations’ usage has to be in compliance with different acts, protecting consumer’s rights: the Fair Debt Collection Practices Act for United States, the Fair Trading Act and the Administration of Justice Act for UK & Wales, the Federal Trade Commission for U.S., the EU Unfair Commercial Practices (for corporate debts only); the Australian Securities and Investments Commission, the Federal Administrative Court (for Germany: Bundesverwaltungsgericht); EU’s Unfair Commercial Practices Directive, valid for all countries in the European Union, etc.

Used literature & external links