Creditors have a variety of means of collecting payment. Methods of extracting payment can range from the annoying -- persistent phone calls and letters -- to the severe -- wage garnishment and bank account seizure. Creditors must make choices about what methods they will use based on their financial situation, the size of the debt and likelihood of recovery.
Financial Considerations
When choosing how to collect a debt, a creditor must consider the main factors: the size of the debt, the cost of collecting it and the likelihood that the debt will be recovered. For example, if a debt is small and collection appears unlikely, the creditor may choose to not attempt collection on the debt, or stick to low-cost methods, such as letters. However, if the debt is large, the creditor may expend more resources.
Debt Collection Agencies
Some creditors, rather than go to the trouble of attempting to collect the debt themselves, will farm out out the debt to professional debt collection agencies. These agencies can be compensated in two ways: by commission, in which the debt collection agencies receive a cut of whatever money they collect; or by allowing the agencies to purchase the debt outright, usually at a steep markdown, in which case the agency keeps whatever money it collects.
Legal Methods
A creditor has a number of ways of compelling a debtor to pay up by force. A creditor must first sue the debtor in civil court and win the case against him. If the creditor receives a financial judgment, then he can petition the judge to take various actions to assure he is paid. For example, he can petition the judge to garnish the debtor's wages, as well as seize money from his bank account.
Considerations
The Fair Debt Collection Practices Act, a federal law, places a number of restrictions on how debts can be collected. For example, if a debtor requests that a creditor discontinue contacting his by phone or mail, the creditor must comply or face potential financial penalties. In addition, the creditor cannot charge the debtor for the cost of collecting the debt, unless a judge orders the debtor to pay these costs.
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