The Inner Workings of the Debt Collection Process

Does your business or public entity have outstanding balances due and owing from clients, customers, or families that need to be collected?  Before embarking on the debt collection journey, it is important to have a general understanding of the process that a creditor must take to collect upon a debt and the laws that apply to the debt collection process.

If you are going to embark upon this journey on your own and not engage a third-party debt collector, such as a collection agency or a law firm, the first step would be to either reach out to the debtor by telephone or through a collection letter.  In either case you should specifically lay out the amount of money that is due and owing to your business, the date the debt must be paid, and the action you plan to take against the debtor if the debt is not paid by the deadline.  If you choose to send out written correspondence, consider including documentation as to the debt that is due and owing so that the debtor has specific proof of the debt.  Alternatively, include in the correspondence verbiage indicating that, if the debtor contests the validity of the debt, proof of the debt can be provided upon request. 

If you are unsuccessful in the collection of the debt through either telephone contact or written communication, the next step would be to decide whether you want to pursue the collection efforts yourself or retain a third-party debt collector to collect the debt on your behalf.  Typically, if you choose to retain a collection agency or law firm relating to the collection of debt, they will charge you a contingency fee to collect the debt.  This means that the collection agency or law firm will agree to take a percentage of what is collected from the debtor as compensation for the services rendered. 

Most contingency arrangements range from twenty-five percent (25%) to fifty percent (50%) and require the creditor to cover any expenses incurred by the third-party debt collection in the collection of the debt (e.g., filing fees, service fees, and skip tracing fees).  The law firm or collection agency will most likely have you sign a written agreement outlining the terms of your relationship, including how the fee will be paid to the third-party debt collector, how long the collection agency or law firm has to collect the debt, and the process or procedure they will use in the collection of the debt.  Understand, in most third-party debt collection contracts, once the debt is turned over the third-party debt collector, the third-party debt collector is entitled to its fee, irrespective of who ends up collecting the debt.  For example, if the debtor contacts the creditor directly and the creditor takes payment on the debt, the third-party debt collector may still be entitled to its entire fee.

Third-party debt collectors are required to comply with certain federal laws relating to debt collection.  The Fair Debt Collection Practices Act (FDCPA) is a federal law that limits the actions of third-party debt collectors who are attempting to collect debts on behalf of another person or entity.  The FDCPA covers credit card debt, auto loans, medical bills, student loans, mortgage, and other household debts.  Business debts are not covered under the FDCPA.  The FDCPA only covers third-party debtor collectors and not creditors collecting a debt on their own behalf. 

The law restricts the ways that collectors can contact debtors, as well as the time of day and number of times that contact can be made.  In the event of FDCPA violations, the debtor can sue the third-party debt collectors, as well as the creditor, for damages and actual attorneys’ fees. 

Third-party debt collectors may only make debt collection calls between the hours of 8 a.m. and 9 p.m., unless specific permission is otherwise granted.  The third-party debt collector can call the debtor’s home or office, unless they are instructed by the debtor not to do so and in that case the third-party debt collector must abide by the debtor’s instructions.  The debtor is required to provide such instructions in writing to the third-party debt collector.  Within five (5) days of contacting the debtor, the third-party debt collector must send a validation notice to the debtor.  This notice must include the following information:  the amount of the debt owed, the creditor to whom the debt is owed, a statement that the debtor has thirty (30) days to dispute the validity of the debt, and the method for doing so. 

Third-party debt collectors can reach out to third parties (i.e., family members, employers, co-workers) to obtain contact information for the debtor.  However, they cannot divulge information relating to the debt or that they are calling as a third-party debt collector.  Further, they can only call these third parties one time.  It is illegal for a third-party debt collector to threaten a debtor with physical injury or arrest.  The third-party debt collector cannot use profane language when speaking with the debtor.  Finally, the third-party debt collector cannot threaten to sue the debtor if they do not intend to do so.  There are other federal and state laws similar to the FDCPA that a creditor should review prior to engaging a third-party debt collector or attempting to collect a debt on their own.

If you decide to pursue the collection of the debt on your own, the next step would be to file a lawsuit requesting a judgment from the court for the amount due and owing.  If the judgment amount that you are requesting is $10,000 or less the action should be filed in small claims court.  If the judgment amount is in excess of $10,000, the action should be filed in civil court. 

You will initiate the court proceedings by filing a summons and complaint.  Once received, the debtor will be required to either appear in person at the initial appearance if the matter is filed in small claims court or file a written answer with the court and the opposing party.  From there, if the debtor contests the validity of the debt, the matter will be set for either a court trial or jury trial to try the disputed issues. 

If the court finds that the creditor has a legal basis for the causes of action pled in the summons and complaint, the court will enter a judgment in favor of the creditor.  Once the judgment is entered, the creditor will docket the judgment by paying a fee to the Clerk of Courts’ office.  By docketing the judgment, the creditor makes the judgment public record so that future creditors of the debtor know that your debt has priority over their debt. 

Once the judgment is granted, the Court will send out a financial disclosure to the debtor that must be completed within fifteen (15) business days.  If the financial disclosure is not returned by the debtor within that above-referenced time period, the creditor can file a motion for contempt requesting the court issue a bench warrant against the debtor until such time as the financial disclosure is returned.  Further, if you receive a completed financial disclosure but you need further information or you feel the information provided by the debtor is not correct, you can work with an attorney to schedule a supplemental hearing.  In a supplemental hearing, the debtor is sworn under oath before a Court Commissioner to answer relevant questions relating to the debtor’s finances and to provide copies of supporting information (i.e., paystubs, tax returns, bank account statements, titles to vehicles and real property).

Once you have obtained information relating to the debtor’s financial position, you must then decide how to collect on the judgment.  There are a number of different options available to the creditor for collection.  First, you can file a garnishment against the debtor.  There are two (2) types of garnishments: 1) earnings garnishments, and 2) non-earnings garnishments.  In an earnings garnishment, the court can order that up to twenty percent (20%) of the debtor’s income be garnished, provided the debtor is not exempt from garnishment.  The garnishment is good for fourteen (14) weeks and will then need to be extended.  In a non-earnings garnishment, the creditor can withdraw funds from a debtor’s bank account or put individuals who owe the debtor money on notice that any amounts due and owing from them to the debtor should instead be paid to the creditor. 

Another option is to file an execution against property of the debtor.  An execution against property allows the creditor to order the debtor’s assets be sold by the sheriff’s department with any proceeds, after the cost of sale, going to the creditor to satisfy the creditor’s judgment.  If there is a surplus after the creditor’s judgment is satisfied, the remainder is returned to the debtor.  A creditor should note that, if the property that is taken is subject to a lien, the creditor is responsible for satisfying that lien, a fact which often eliminates this as an option for creditors looking to collect a judgment. 

Finally, it is important to note that there is a set time limit upon which a creditor can bring suit for a debt.  Once that time has expired, the creditor is barred from suing a debtor or even threatening to do so.  The cause of action that forms the basis for the debt determines the applicable statute of limitations for the debt.  However, in some instances where the matter is barred by the statute of limitations, if the debtor agrees to make a payment on the debt or makes a payment on the debt, such action can reset the statute of limitations period, thereby allowing the creditor to pursue collection of the debt.

The collection of debt is an involved process.  Some creditors may feel comfortable handling their own collections.  If you do not feel comfortable pursuing such matters on your own, consider retaining a third-party collector.  Either way, it is imperative that the person handling these matters understands and complies with all relevant debt collection laws.  Violations of the FDCPA and other state and federal laws can result in significant fines and forfeitures.  Additionally, violations of these laws can allow the debtor to bring suit against both the third-party debt collector and the creditor to recover any damages the debtor has sustained by the violation as well as the debtor’s actual attorneys’ fees.