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When you take out a loan, you make a promise to a lender to pay back the amount in full plus the interest. This repayment usually has a term and you are supposed to repay the full amount before the period ends. Depending on the terms of agreements, the payments are generally in instalment and paid either weekly, bi-weekly or monthly.
If you miss the payment, the lender notify you about it via a phone call or email. If you miss multiple payments, the lenders try to collect from you directly. It starts with an overdue notice on your bank statement, and the lender then moves to phone calls, emails and other forms of contact.
If you are receiving several late payment notifications, then know that your lenders are thinking to take a serious and more intense approach. Once an invoice is 90 days past due, lenders and creditors do not hesitate to put more pressure on you. If you do not pay heed to even their calls and warnings, then the lenders are left with two options: first, legal action; and second, using a collection agency. Let’s understand both of them in detail.
1. Legal Action
In the legal action, the borrower is taken to the court for not paying. You, as a borrower, receive formal notification in the mail or in person, that states the court date and all other details of your hearing. It is indispensable you do not miss the court date. If you miss the proceedings, the collection agency gets a default judgment and starts collecting on the unpaid debt.
The court has the power to make the payment directly from your paycheck through wage garnishment. In some instances, the assets of the borrower are seized as well. So, in any case, do not miss the court date because they will haunt you for long. Also, know that the legal action is a very lengthy process, which involves paperwork, wait times and notices. So, it is not suitable for creditors. However, if you refuse to pay after months of notification, they will be left with no option but to take legal action.
2. Use of A Collection Agency
In order to minimize the losses, the creditor tries to collect as much money as possible from you. They send outstanding debt accounts to a business that focuses on the collection of unpaid accounts professionally.
The obligation for collecting your debt is passed from the lender to a major debt collection organisation when your debt is sold to a collection agency. A collection agency is a company that specialises in obtaining payment for debts owed by people or businesses. When lenders or credit card companies are unable to collect money owed to them, they frequently use collection agencies to seek customers who have fallen behind on their payments or whose accounts have gone into default.
Because these agents are often more aggressive and persistent than lenders or credit card issuers, knowing your rights is critical. With more phone calls, notices, the collection agency will be determined to collect your bad debt.
How do Collection Agencies Make Money?
Collection agencies either buy an account that is in default or are hired by a credit company that needs to collect the debt. In either case, it is not a free service and collection agencies make money through it. When a creditor needs to hire a debt collection agency to handle delinquent accounts, they typically agree on a price.
Debt collection agencies also buy delinquent debt cheaply and try to recover the amount from the debtor. The owned debt is generally larger than the agency paid for the account. So, the more they retrieve, the more they earn.
How to Deal with Collection Agencies?
The best way to deal with a collection agency is to pay the full amount you owe, only then you can avoid further communication with them. But if you are unable to pay the full amount, the best way is to get in touch with an agent and explain your situation. You can explore a few options with your agent. One of the possible options can be making a new agreement with the agency and getting it in writing proof. One tip while dealing with an agency is that when you send cash, have a receipt of every transaction with the agency.
Know Your Rights
A fraction of the loans made by banks and lending institutions are expected to be uncollectible. However, they would try to recoup as much as possible before closing your account. They either take legal action or use collection agencies to do so. Collection agencies are the last resort, but they can assist creditors in collecting as much money as possible from you. It’s also crucial to understand your rights while dealing with collecting agencies.
You have a right to know if your creditor has sold your debt to a collection agency, and you should be notified in writing. A delinquent credit account being sold to more than one collection agency is extremely rare. It’s not impossible, though. It’s possible that your account will start with one collecting agency and subsequently be moved to another. As a result, always ask who you are speaking with and if they have confirmation that they are allowed to collect from you before making a payment.
The Bottom Line
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