Not everyone who takes out a debt pays it back. Depending on the circumstances, a debtor may be subjected to debt collection or recovery. The difference between the two is who is trying to retrieve the debt.
In debt collection, the creditor attempts to recover credits and loans that remain unpaid. Debt recovery, on the other hand, involves a third-party collection service that primarily focuses on recovering all the debt owed.
Contact from a debt recovery service means you are on record for defaulting on a loan. Debt recovery is what follows after debt collection fails.
However, before reaching this debt recovery there is a process that guides the pursuit of debt immediately after defaulting. The debt collection process is the first attempt at recovering a debt. It’s initiated by the creditor and is often conducted by first-party debt agencies that are part of the original credit agreement.
Immediately a client defaults on payment, he/she a few days from the payment due date to finalize on the payment including the late fees.
Payment clears your name and keeps you off the bad books in the credit bureau. In an effort to secure payment, the creditor forwards reminders to the debtor through phone calls, letters and emails.Sometimes the only reason for defaulting on a loan is forgetfulness and reminders are enough to secure payment.
However, in some cases, the debtor is unable to pay under the terms of the credit agreement and renegotiation on payment may be done. If an amicable solution reached there is no need to proceed with the recovery process.
If efforts by the creditor and first-party agents fail,the debt can be forwarded to external agents that specialize in retrieving delinquent debt, third-party agencies.
At this point, a report could be filed with the credit bureau and your credit card account could be suspended. The lender writes off the debt from their books and forwards all debts recovery efforts to the third-party agent.
The Debt Recovery Process
Third-party agents either buy debts or pursue debts for a fee. The latter is popular among many debt recovery Service. Although they are not party to the original agreement, these debt recovery agencies outsource to chase payments.
They generate revenue by taking a piece of the cake when payments are secured. The charges for their services depends on several factors including the amount due, the age of the debt and number of failed attempts at recovery.
The debt collection agency takes claims and documentation to support and note the debtor’s failure to pay and meet the terms of the credit agreement. The recovery process begins with sending a demand letter to the debtor and the client (the lender) also receives an acknowledgement letter.
Debt buying is the other alternative in debt recovery. It offers instant revenue for the creditor and involves selling debts at a debt collection agency.
A sold debt belongs to the debt collection agency. The debts are sold as good of value but at a lower price than their actual value. Sold debts once recovered are not forwarded to back the creditor. They belong to the debt collection agency.
Telephone contacts are among the initial efforts made by the debt collection agency to recover the debt. The calls are made to brief the debtor on the outstanding loan and also come up with a payment schedule.
Since debt recovery is a long process, phone calls also keep debtors informed on how their case has progressed. Auto calls have become increasingly common but they serve the same function
Emails and SMS notifications are also used by collection agencies. Currently, most of these communication systems are automated to improve compliance with debt recovery regulations and improve the recovery process.
Letters remain important communication media. A debtor can choose a preferred means of contact to simplify communication.
Unfortunately, not all debtors will cooperate with resolving the debt recovery process. As a result, the debt collection service can forward a claim to the affiliated attorneys. If legal action is recommended, the requirements for a lawsuit are provided and the client can authorize legal action.
Recovery efforts can end following a request by the creditor or the death of the debtor (with no estate to lay claim). Nonetheless, debt recovery agents are important since they ensure bad debts don’t dig into company finances and payments are made following a legal process.
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Author: Varun Rana