How The Debt Collections Process Works

How The Debt Collections Process Works
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Debt collections is a term that many businesses are quite familiar with and refers to the process of pursuing payments on debts which are owed to a business by individuals or companies. For any company or business, cash flow is paramount, and is actually the lifeblood of the organization. Ensuring that customers pay the amount of money that they owe a business is just as important as acquiring new customers. This is because a business will not be able to expand and grow if it has not been paid for its products and services. In a bad debt collection situation, the company might even have to close up shop.

The Debt Collections Process

The process of debt collections involves sending a friendly reminder once a payment is overdue. This can be done on the phone or via email. The second step involves sending a reminder and trying to contact the consumer or business in order to get information regarding when payment will be made. If all of this fails, the next step is to send a final notice and to look for direct contact with the debtor so that you can agree on how payment will be made. The last option, when everything else fails, is to send a demand letter. Most businesses do not like carrying out this step because it can lead to damaging of relations between the two parties, and businesses need to retain customers. Because of this, a demand letter is often done as a last resort.

Types of debt collectors

In the debt collections process, there are several types of debt collectors including:

  • First party agencies
  • Third party agencies
  • Debt buyers

First party agencies are usually a subsidiary or a department of a particular company, and they follow up on debts owed to that business only. Third party agencies are not part to the original contract, and are most commonly used on a contingency fee basis by the business attempting to collect their debts. Debt buyers are different in the fact that they will purchase outstanding debts from creditors for a percentage of the debt’s value, but then will pursue the debtor for the full amount owed. Debt buyers and third party agencies can help a business concentrate on its core functions and not have to worry about pursuing unpaid debt. They also help businesses reduce their operational costs, which would have otherwise been spent trying to follow up on debts. More often than not, third party agencies and debt buyers help a company reduce exposure to regulation and technology risks.

Pursuing Debt

The process of debt collections is not as easy as it sounds. It can get complicated because of the applicable laws. For instance, collectors may not be able to sue for old debts because there is a limited number of years, usually known as the statute of limitations, within which a creditor can attempt to collect a debt. These laws vary, and it is important for a business looking to recover its debts or an agency undertaking the same to be updated on these local laws and regulations.

In order to avoid having credit collection issues, companies and businesses are advised to come up with and implement a credit policy which will guide all of their unpaid debt issues. The use of a credit reporting agency as well as using debt collectors in debt collections is also encouraged for businesses trying avoid wasted time and resources on collecting unpaid invoices.

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