Debt collection

Helene Mueller
eCollect support team

Debt collection as a process and as a financial term construes the whole system of debt recovery practice techniques and proceedings for a successful default payments’ recovery. The recovery operation starts with the formation of bad debt, or with the genesis of a past-due payment. When the creditor undertakes primary collection steps, the process usually involves informative reminders and general phone calls to the subject of debt. If the operation is not prosperous, the creditor will typically turn to a third-party collection agency, widely known as a debt recovery company. After the lender assigns the debt case to the DCA (Debt Collection Agency), the recovery company will start gathering the delinquent payments. The role of a DCA consists of tracking the debtors and recovering the due amounts to the original creditor. The collection services they offer can also include continual monitoring of debtor’s profile and investigation of future creditor’s borrowers and business partners (for commercial loans).

Debt collection process

Although there are different types of debt categories, the collection process is generally the same. A debt recovery agency is typically involved in the debt recovery operations when the amount due to be paid is part of an unsecured debt. Such amounts do not consist of a collateral, and if the loan contract has been breached by the consumer, the creditor cannot secure his financial income with a material object, possessed by the debtor. Therefore, if the borrower falls behind with his scheduled payments, the lender cannot confiscate the material object, when it comes to secured debt amounts. The typical collateral for secured debts is usually an estate property or a car.

A debt collecting agency can perform recovery of consumer or business-to-business late payments. Commonly, the debt collections of both types debts are the same, with small differences. When a DCA or a creditor attempts to collect a debt from a consumer, he can request wage garnishment or seizure of personal belongings from court. This is a legal process and must be authorised by court in writing. If a collection agent turns to law methods, when recovering a past-due amount from a business debtor, wage garnishment and seizure of personal belongings is not applicable, as the subject of debt is not an individual, but a corporation. Instead, seizure of office furniture and equipment can be seized.

Small claims court procedure can be carried out, but only if the size of the business debt is generally small. In United Kingdom this amount should not exceed £10,000 (source:
). If the debt is foreign, it falls under the European Small Claims Court Procedure (source:
). In Canada the monetary sums applicable for small claims court documents vary between states: in Ontario the limit is $25,000; in Quebec- $7,000; in Alberta- $50,000; etc.

A DCA can also carry out either an international or local debt recovery, depending on the location of debtor. If the consumer and the creditor are residents of the same country, the recovery agency will perform local debt collection. If the countries differ, then a transnational debt recovery is possible.

Foreclosure & garnishment

Foreclosure and garnishment can be part of the recovery process. The first term falls under the secured debt graph and typically involves mortgage foreclosure. When a consumer has late payments, the creditor will usually require a foreclosure order from court to repossess an estate property or other material object, which is part of the secured debt’s collateral. This process is regulated by law (e.g. debt collection’s foreclosure in U.S. is controlled by the Fair Debt Collection Practices Act). A foreclosure takes place after the borrower goes into default and after the creditor has contacted or tried to contact the debtor within a certain period of time, but the amount still remained unpaid. In U.S. this period is up to 90 days. After that the creditor has the right to proceed with court actions, send a Notice of Foreclosure to the subject of debt, and request lawful repossession of property.

A garnishment can also be present at the debt collections process, but is included approximately 6 months after an amount has been marked as past-due. It can be used for recovery of either secured and unsecured debts. Such process can consist of either seizure of property or wage garnishment. For both a written permission from court is requested, as both actions are strictly regulated and controlled by law. In U.S., for example, a wage garnishment cannot exceed 25% of debtor’s monthly income.

Both garnishment and foreclosure, when involved in the debt recovery process, fall under the jurisdiction of strict laws, protecting the debtors from unfair collection practices: the Consumer Credit Protection Act, the Federal Wage Garnishment Law and the Fair Debt Collection Practices Act, all for U.S.; the Financial Services Authority for UK & Wales, etc.

Used literature & external links