- A default occurs when an account holder for a loan or credit arrangement fails to make payments for an extended period of time. If accounts sit in default for too long, companies will write off the debt in their accounting records, moving it from the asset category to the expense category.
- Collection agencies seek out bad debts that companies wish to remove from their books. By selling written-off debt to a collection firm, the original lender can recoup a bit of the loss without incurring any additional collection-related expenses. After the debt is sold, the borrower in default legally owes money to the collection company, not the lender.
- The Collection agency begins its specialized process by notifying the debtor via mail and by phone that his debt has been purchased and that the collection agency would like to speak with the borrower about repayment terms.
- Collection agencies are generally very patient in their dealings with debtors. After receiving negative responses, or no responses at all, to the first few rounds of communication, the collection agency will escalate the language in notifications. After a few months of non-compliance, the collection agency will begin to inform the debtor about the agency's intention to file a civil court case against her and impose additional account fees and interest charges.
- If a debtor consistently refuses to work with a collection agency, the agency will file a formal complaint in civil court and send the debtor a notification of the filing. The debtor will have an opportunity to respond to and delay the complaint; otherwise a court date will be set. During the court session, a judge hears the arguments of the collection agency and the debtor.
- A debt settlement is the more desirable alternative to court proceedings. If a debtor is willing to work with the collection agency, the agency will negotiate to accept a lump-sum cash payment or set up a payment plan to settle the debt over time.
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