Debt collection is the process used by creditors to get money back that hasn’t been paid by individuals or businesses who owe it.
It’s important for both the people trying to collect the debt and those who owe the money to understand each step of this process. This helps creditors recover their money and makes sure that those in debt know their rights and options.
In this article, we’ll break down how this process works, from the first time a creditor reaches out about an unpaid debt, to the possible legal actions that can be taken if the money isn’t paid.
What is the debt collection process?
Debt collection is the process through which creditors and collectors attempt to recover unpaid debts from individuals or businesses who are legally bound to pay or repay money they owe. It’s typically initiated after a debtor fails to make payments on types of debts such as loans, credit cards, medical bills, or other obligations according to the terms set by the lender.
The debt collection industry in the UK is regulated by the Financial Conduct Authority (FCA). The FCA sets standards and guidelines to make sure that debt collection practices are fair, transparent, and considerate of debtors’ circumstances. Additionally, debt collection must also comply with the Consumer Credit Act and the Consumer Rights Act.
The process is structured into several stages, gradually escalating in intensity if the debts remain unpaid. The structured approach is designed to provide multiple opportunities for debtors to settle their debts before more severe measures, like legal actions, are taken.
Here’s a closer look at the process:
Initial contact
The process begins when the creditor first notifies the debtor of the unpaid debt. This contact is usually made via phone, email, or a letter. The initial communication will detail the amount owed and possibly the origin of the debt.
The creditor or debt collection agency must provide clear information about the debt, including how and when it was incurred, and any additional charges or interest that may apply.
This stage often involves attempts to negotiate a payment plan that is manageable for the debtor, considering their financial circumstances.
It’s important to not ignore letters from a debt collector as this may lead to further actions being taken against you. Citizens Advice says try to respond to any claims as soon as possible, typically within two weeks. If you believe that you do not owe the debt, you should clearly state your disagreement in your response to the creditor.
Formal notice
If initial contact does not result in payment or a payment arrangement, the creditor will send a formal demand letter. This letter should restate the debt amount, how it was calculated, and the consequences of non-payment, including potential legal actions.
Often, several reminders might be sent which could include a final demand letter stating that this is the last communication before legal action will be taken.
Legal action
If payments still aren’t being made after formal notices, the creditor might initiate legal proceedings. This involves filing a claim in a court to seek a judgement against the debtor.
If the court decides in favour of the creditor, a judgement will be issued against the debtor. The judgement confirms the amount owed and allows the creditor to take further legal steps to recover the debt.
Enforcement
Enforcement is the legal means by which a creditor compels the payment of the debt, following a successful court judgement against the debtor.
Here’s an overview of the key enforcement methods used in the UK:
Wage Garnishment: Also known as attachment of earnings, this method involves a court order that requires the debtor’s employer to deduct a certain amount from the debtor’s wages and send it directly to the creditor until the debt is paid off.
Seizure of Assets: Through a process known as “taking control of goods”, bailiffs or enforcement agents can seize the debtor’s possessions. These agents are granted the authority by the court to enter the debtor’s property and remove goods equivalent to the value of the debt.
Charging Orders: If the debtor owns property, such as a house or land, the creditor can apply for a charging order. This order secures the debt against the debtor’s property, meaning the debt must be paid once the property is sold.
Third Party Debt Orders: These orders are used to freeze funds in the debtor’s bank or building society account. The court can then direct that these funds be used to pay the creditor.
Insolvency proceedings
If a debtor is unable to pay their debts, the insolvency proceedings below may be considered:
- Individual Voluntary Arrangements (IVA): An IVA is a formal agreement that allows a debtor to pay creditors over an extended period, after which any remaining debt is usually forgiven.
- Bankruptcy: Bankruptcy is a legal status where individuals or businesses unable to repay debts have their assets liquidated to cover their liabilities, often relieving them of remaining debts thereafter.
- Debt Management Plans (DMP): A DMP is an informal agreement where a debtor repays their debts through a debt management company, which then distributes payments to creditors.
Does debt collection affect credit score?
The debt collection process can have a significant impact on an individual’s credit score. Once a debt is reported as being in collections, this negative mark can stay on your credit report for up to seven years, affecting the ability to borrow money or secure favourable interest rates. The severity of the impact depends on the rest of the credit history, but paying off the collection’s debt can help to improve your credit score over time.
How do I pay off my collections debt?
Paying off collection’s debt involves negotiating with the creditor or collection agency to settle the amount owed. It’s important to communicate openly and negotiate a realistic repayment plan or a settlement amount that is manageable.
When dealing with collections, it’s important to get any agreement in writing and keep records of all payments made. Proactively managing collections debt can help minimise the negative impact on your credit score.
Here are some strategies:
- Communicate with creditors: As soon as you realise you’re unable to make a payment, contact your creditor. They may offer a payment plan that fits your current financial situation.
- Negotiate the debt: In some cases, you may be able to negotiate the amount owed. Creditors might accept a lower amount if they believe it’s the most they can realistically recover.
- Consider an IVA or DMP: An IVA or DMP may be suitable for those with significant debt. These arrangements allow you to pay off your debt over time in a way that’s manageable within your budget.
Debt collection is a challenging process, but understanding your rights and the steps involved can empower you to navigate it more effectively. Acting early can help minimise the impact on your credit score and lead to a more favourable outcome.
To learn more about the debt collections process, visit MoneyHelper to get free advice. Alternatively, speak with one of our expert advisors today.
