Enforcement & Debt Recovery

The entire basis of the lending profession is to provide a service to consumers while also accruing profits through interest charges on money that has been lent out. Financial problems, unforeseeable life events and simple forgetfulness can result in a borrower failing to make the agreed-upon payments to his lendermaking it necessary for his lender to employ debt recovery procedures.

Facts

The simplest way for companies to encourage consumers to catch up on their overdue debts is by assessing late fees. Late fees are free for the company and provide each individual whose account is overdue with immediate incentive to pay. The individual knows that, should he continue to ignore his financial obligation, the late fees will increase. Late fees are also a favorable method of enforcement since they generate additional revenue for the lender.

Lenders may also encourage debtors to make payments by reporting late payments to the credit bureaus. Each individuals payment history accounts for a substantial percentage of his credit score. Continuing to forgo payment, therefore, will damage the debtors credit rating.

Types

According to the Federal Trade Commission, all consumer debts are either secured or unsecured. Secured debts are attached to property, such as a vehicle loan or home loan. If a consumer stops submitting payments on a secured debt, her creditor may simply seize the asset the original loan was attached to and sell it to recover the debt. Unsecured debts are not attached to property. Because of this, they carry higher interest rates and are often more difficult for creditors to enforce.

Time Frame

While secured creditors are not bound to any certain time frame when recovering secured debts, unsecured creditors must adhere to the statute of limitations for debt collection in the debtors state when collecting overdue balances. Although a creditor reserves the right to continue attempting to enforce the debt indefinitely through phone calls and letters, it cannot pursue legal action against a debtor once his states debt collection statute has expired.

Features

Provided a creditor files a lawsuit within the legal time frame for doing so, it may use the resulting court judgment as an enforcement tool. The rights a judgment provides a creditor may vary, depending on the state, but in many states creditors may use their judgments to garnish an individuals wages, seize funds from her bank accounts and file liens against her personal property.

Considerations

Not all debts are enforceable for creditors. The U.S. Department of the Treasury states that certain forms of income, such as Social Security payments and other federal benefits are exempt from legal attachment. Thus, even if a creditor filed a lawsuit within the appropriate time frame, it could not use its judgment to force debtors to relinquish exempt income. It may still attempt to recover the debt, however, through contacting the debtor and demanding payment.