When a debtor owes a large sum of money to a creditor, the creditor may attempt to compel the debtor to pay by initiating a collections process. While the creditor has likely so far attempted to encourage payment of the debt by assessing fees or additional interest, when he initiates the collections process, he uses several new tactics.
Features
The collections process can take many different forms. The creditor may take personal action, such as by sending letters or making calls to the debtor, or he may take legal action, such as filing suit in court to recover the money. In many cases, the creditor will report the late debt to a credit reporting bureau. This way, if the person does not pay the debt, his credit rating will be affected.
Collection Agencies
In lieu of attempting to collect the debt themselves, many creditors will hire a credit collections agency to seek payment of the debt for them. Credit collections agencies are businesses dedicated to collecting outstanding payments due from debtors. Generally, credit collections agencies will agree to take on a debt for a fee, usually a percentage of the debt that the agency successfully collects.
Collateral
Debts come in two main types: secured and unsecured. When a debt is secured, that means that the borrower offers some type of collateral that the lender can seize if the borrower defaults on the debt. During the collections process, the creditor may attempt to seize the collateral. For example, in the case of a car loan, the creditor may attempt to seize the borrower's vehicle.
Effects
The collections process can have a number of different outcomes. In many cases, the debtor will find a way to pay up. In some cases, the creditor and debtor may negotiate a settlement in which the creditor agrees to accept only partial payment for the debt or to accept it over a longer period of time. If the case is resolved in court, the debtor may be legally ordered to pay and the creditor given means to seize assets.
Restrictions
According to the Federal Trade Commission, federal law prevents creditors from engaging in many unscrupulous or harassing actions. For example, a creditor cannot make threats of violence or lie to the borrower about the consequence of not paying, such as saying that he will be placed in jail. For a full list of actions that creditors and collection agencies acting in their stead are forbidden from performing, creditors should consult the FTC's website.
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