According to a report from the Consumer Credit Panel (CCP), more than one in four Americans (28%) have at least one debt in collections. This highlights the need for debt collection services. However, given the constantly shifting legal landscape, navigating the complicated world of debt collection can be difficult.
Legal-based collection is a complex field that arises when individuals or businesses are unable to repay their debts despite several follow-ups and warnings. To ensure successful collection and compliance, creditors and debt collectors must use efficient tactics and consult with attorneys.
This article will describe the legal-based collection process and when it is needed. It will also guide you on the importance of complying with legal requirements and the best strategies to follow to maintain a healthy cash flow and business reputation simultaneously.
Before hiring a debt collector, you must keep in mind one crucial legal requirement as per the Consumer Financial Protection Bureau (CFPB) guidelines: the debt collection validation notice or simply a debt validation letter.
The Fair Debt Collection Practices Act (FDCPA) mandates that the collector has to provide the debtor with this letter within five days of their initial interaction.
It must include the following:
If the debtor requests debt verification, the collector halts the collection efforts to verify the debt and generate the Debt Verification Letter.
After that, collection letters and phone calls may continue as per their usual routine. The collector should politely ask for payment in all correspondence and specify when delinquencies will be reported to the credit bureaus.
If a payment agreement is still not finalized, or if the debtor doesn’t respond or denies paying the debt, you may take legal action.
Did You Know? A debt collector or creditor may also pursue legal action if the debt is nearing its Statute of Limitations.
Now, let’s understand the several steps involved in the legal-based collection process.
For businesses seeking to recover funds from delinquent accounts, having a well-structured legal collections strategy ensures that the process is efficient, compliant, and ethical. Here are the important steps involved in the process.
The above flowchart represents a step-by-step guide, visually outlining the critical stages in pursuing a debt recovery through legal means.
Sending a demand letter to the debtor is typically the first step while pursuing legal action to collect a debt. It notifies the debtor that they have a debt that needs to be paid immediately. In the demand letter, you inform the debtor that legal action will be taken if payment is not received. This is a legally binding document; hence, if needed, you can produce it in court.
Sometimes, a well-written demand letter can persuade debtors to pay off their obligations without going to court, which saves both sides time and money.
If the demand letter is not met, the next course of action is to file a lawsuit. To do this, you need to file a complaint detailing the debt, the agreement, and the nonpayment with the court. Contracts, invoices, and payment records are examples of evidence that you must provide to substantiate the claim.
Following the lawsuit filing, the court will issue a summons, which is a formal document that informs debtors of their duty to reply and gives them a deadline for doing so. Usually, a sheriff's deputy or process server serves the summons.
The summons informs the debtor of the legal action being taken and provides them with the opportunity to respond.
Note: A debtor may be able to contest the lawsuit on procedural grounds if they are not properly served.
The debtor has 20 to 30 days after obtaining a summons to reply. They can acknowledge or refute your claims.
Both sides must exchange information and evidence throughout this stage of the legal process. They may be asked to provide the necessary documents, answer written questions under oath, and even take part in depositions (interviews under oath).
During this step, the parties can learn crucial information about the case, determine whether a settlement or trial will best suit their interests and strengths, determine how strong each party's position is when examined more closely, and identify potential defenses or counterclaims that either side may make.
In a settlement, both parties agree upon one or more facts of the case, such as who owes what to whom.
If no such agreement can be reached, the next stage of litigation is trial, where the court will hear evidence from both sides. During a trial, both sides offer arguments and supporting documentation to reach a decision.
If your lawsuit is successful, the court may grant a judgment in your favor, requiring the debtor to repay the obligation. After the judgment, you have a variety of enforcement strategies to collect the debt, such as:
Also Read: Small Business Debt Collection: A Step-by-Step Guide
Now that you’re aware of the legal-based collection process, you need to understand that ensuring compliance with debt collection laws is paramount for creditors and debt collectors.
This section will explore the importance of compliance with debt collection laws and the consequences of not adhering to them.
Legally, you are entitled to get paid for debts owed to your business. Negotiation, settlement, or legal action are some of the ways you can pursue debtors to recover the money.
While you have the right to collect debts, debtors have certain rights under the law, including the right to dispute the debt and the right to be treated with fairness throughout the collection process. As a creditor, you must respect these rights to avoid legal repercussions.
You must also comply with the legal guidelines under the FDCPA that prohibit harassment, false representations, and other abusive practices during debt collection.
Breaking debt collection regulations may result in serious repercussions, such as penalties, fines, and even the rejection of a debt collection lawsuit. Non-compliance may also harm your firm's reputation, affecting its capacity to recover future debts and leading to sour relationships with clients.
Do you find managing legal debt collection difficult? Is your business suffering from delinquent accounts receivables? Let South East Client Services (SECS) help streamline the legalities of your debt collection process. Our expert team is here to help you navigate debt compliance and management with precision and ease.
Now, let’s look at some strategies you need to consider while handling legal debt collection.
It is essential to combine proactive tactics with a thorough comprehension of your legal and financial environment to ensure a successful debt recovery operation. By being strategic and following the best practices, you increase your chances of getting paid.
You should thoroughly investigate the debtor's financial status prior to pursuing any legal action. Checking for past judgments, bankruptcies, or other liabilities that can affect the debt collection process can help you decide if it is worth the time and money to pursue legal action.
When speaking with a debtor, be transparent and honest about who you are, what you are trying to accomplish, and your intentions. Avoid complex legal terms that could be confusing to a debtor.
Pro Tip: Always conclude discussions with a call to action. For instance, "Could you confirm the payment will be processed by Wednesday?" establishes accountability and provides a clear deadline.
Establish standardized procedures and policies, such as record-keeping procedures, documenting debt-collection activity, and monitoring debtor communications, including phone calls, emails, or letters sent/received.
Establish an effective procedure for following up on unpaid invoices; this may involve sending timely reminders and, if necessary, taking the case to a small claims court.
Adhere strictly to privacy laws by not disclosing information about a person or business’ debts without their permission.
Hiring a creditors' rights attorney can effectively reduce the legal risks involved with debt collection. Since attorneys specialize in debt-collecting laws and regulations, they can offer correct assistance and advice on compliance matters.
They can examine your company's collecting rules, practices, and documentation to identify possible risk areas and implement mitigation plans. Attorneys can also advocate for the company's interests and handle the legal process in a dispute or complaint.
After several tries at collection, if a debtor still does not make payments, properly notify the debt to credit bureaus.
As creditors, you can use the legal-based collection process, a formal procedure, to enforce debt repayment in court. It entails several stages, including submitting a demand letter, filing a lawsuit, and, if required, proceeding to trial.
Therefore, comprehending the legal collections process and strategizing accordingly can assist creditors like you in navigating the intricacies of credit recovery and debt enforcement. However, if you’re confused with the legal jargon and need professional expertise, South East Client Services (SECS) is here to help.
Our team is committed to guiding clients through every step of the legal collections process, offering expert advice and solutions tailored to their specific needs.
Contact SECS today if you need expert guidance to pursue legal action to recover money owed from debtors.
