Finance & Accounting

Debt Collection: An Analysis

Businesses often face a financial crunch due to delayed payments by their customers and the inability of the businesses to collect those payments and other debts as the same is considered an extremely tiring and time-consuming process which can deviate their focus from the key goals of the organisation, thereby restricting its growth.

Debt collection companies offer services to creditors and ensure the collection of debts at the earliest and are the key players in settling differences between creditors and debtors. The article analysis debt collection in India, the benefits of hiring such a company and the process followed by such a company in debt collection. 

What is Debt Collection?

Debt collection refers to the process of pursuing payments of debts owed by businesses or individuals, which is done by a company or individuals most commonly known as a Debt Collection Company or debt collectors having proficiency in such  collection. Most collection companies operate as agents of creditors and collect debts in exchange for a fee or percentage of the total amount owed.

Types of Debt Collection Companies

First-Party Companies 

First-party companies are a part of the original creditor and therefore get involved earlier in the debt collection process and have a greater incentive towards trying  to maintain a constructive customer relationship; however, they may not be subjected to legislation governing the third-party collection agencies. These companies try to collect debts for several months prior to passing them to a third-party company or selling the debt and writing off most of its value.

Third-Party Companies 

On the contrary, the third-party companies are not party to the original contract. The company is assigned the accounts of the creditor by the creditor itself. The creditor assigns accounts on a contingency-fee-basis, which usually costs nothing to the creditor or merchant initially except for the cost of communications. However, the same is dependent on the (SLA) that exists between the creditor and the collection agency.

The company takes a percentage of debts successfully collected, sometimes known in the industry as the “Pot Fee” or potential fee upon successful collection. This does not necessarily have to be upon collection of the full balance; very often, this fee must be paid by the creditor if they cancel collection efforts before the debt is collected. The collection company makes money only if money is collected from the debtor (often known as a “No Collection – No Fee” basis). Depending on the type of debt, the age of the account and how many attempts have already been made to collect on it; the fee could range from 10% to 50% (though more typically, the fee is 25% to 40%).

Benefits of Availing of Debt Collection Services

The benefits of availing of the debt collection services are enlisted below.

Legal Protection

There are various laws that govern debt collection in India, which have encouraged aggrieved parties to initiate legal proceedings without any hesitation. The companies specialized in the collection of debt are well aware of this scenario, due to which they are well versed in these laws. Third-party companies are knowledgeable in both federal collection laws and the laws that govern the state in which the company holds a license; therefore, allowing a company specialized in collection of debt to recover unpaid debts eliminates the legal risks involved with attempting to collect debts by the actual creditor.

Successful Debt Recovery

Hiring a collection company increases the odds of collecting delinquent debts due to the fact that these companies have experience in collecting unpaid debts. The primary focus of every company is to run their business for its growth, whereas the main focus of a debt collection company is the collection of debts on behalf of its clients. A trained professional is well versed with the best techniques to legally coerce debtors to pay, and collection companies post a much greater threat to debtors than the actual creditor does. A collection account negatively affects a debtor’s credit score for up to seven years, and debtors often make arrangements to pay back their debts in order to avoid damage to their credit.

Flexibility

Collections Companies have a variety of programs that fit with different business models, and the collection company often modulate such programs as per the business owner’s needs. Some companies pursue debtors for a flat fee, while others receive a commission on the amount successfully collected by the agency. The different programs help the creditors to find the right company for their needs.

Documentation

The collection companies believe in maintaining the records of each transaction that takes place during the course of debt collection, including the time the company contacted the debtor for the payment and their response in respect of the same.

This documentation demonstrates to the court that the creditor, as well as the collection company, had put forth an extensive effort to recover the debt, and the debtor failed to make the payment even after repeated reminders.

Additionally, if the creditor claims the bad debt as a tax deduction, there is a need to have this documentation for your tax files. In case of an audit, the IRS^[1] will want to see that the creditor exhausted every option before writing off the debt and claiming it as a deduction.

Faster Payments

Availing of the debt collection service from a collection company enables faster payments. Some collection companies offer services that accelerate the payment process. These services work with the existing billing process. When such a company is hired by a creditor, it takes over the hassle of chasing down the creditor’s customers, thereby saving time, money and energy, helping the creditors to have time to focus on what’s really important for their business.

Process of Debt Collection

The process of debt collection followed by the specialized company company is elaborated on below –

Placement of the Client’s Account for Debt Collection

The first step taken by the debt collection company in the collection process is placing the account of the client for such collection upon being hired by such a client for the required purpose.

Collection of Information and Supporting Documentation

The next step involves the collection of information along with supporting documents and other relevant evidence to support the case of the client, which may include the bills or other receipts that prove the failure on the part of the debtor to make the required payment.

Review of Data and Maintaining a Record

After the data and the relevant information is received, the debt collection company reviews the data and maintains the record of the data so collected to avoid the misplacement certificate of the same.

Exchange of Letters between the Parties

The collection company sends the demand letter to the debtor via mail, fax or email, followed by sending the acknowledgement letter to the creditor, i.e. the client.

Initiation of Contact

Subsequent to the exchange of letters to the parties, the collection company move towards initiating a conversation between the debtor and the collection company by way of phone calls.

Arrangement of the Payments

The collection company thrives to constantly remind the debtor to make the required payment to the creditor and obtain clear commitments regarding such payment from the debtor.

Materializing the Payments

If the company obtains the payment, it attempts to materialize such payments for the benefit of its client.

Attempts for Pre-Legal Collection

Upon the failure of the debtor to resolve the debt, the company makes pre-legal collection and sends the update and recommendations for the collection along with the details of forwarding the claim to the attorneys.

Authorisation by Client

The claim is forwarded to the attorneys only upon the receipt of an authorisation by the client, consequent to which the attorneys start investigating the claim for a stipulated time period and update the client accordingly to confirm if the client is willing to initiate the legal action along with providing the company with the suit requirements.

Preparation and Filing of Suit

After receiving the suit requirements, the company prepares and files the suit for the collection of debt from the debtor and awaits the reply of the debtor. If the debtor furnishes the reply, the discovery process is started, followed by setting a trial date; however, if the reply is not received from the debtor, the attorneys file for default judgement in the event of non-receipt of any reply from the debtor.

Writ of Attachment and Verification

If the judgement is passed in favour of the creditor, the attorney files a writ for the attachment and attempts to locate and verify the assets of the debtor along with initiating  bank levies/ garnishment orders/ liens/ etc. to satisfy the judgment.

Conclusion

Debt collection plays a vital role in stabilizing the funds of the company. Therefore it is important for businesses to hire a company having expertise in such collection to fasten the collection process and increase cash flow in the business, facilitating the growth of the business.   

Enterlice has a team of experienced Attorneys and CA/ CFAs, to analyse their needs of its clients, structure the collection process and initiate the requisite actions on behalf of the clients to ensure timely collection of debt and maintain cordial relationships between the parties.  

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