Debt settlement can be a challenging procedure. The weight of debt may be heavy. It is too simple to lose patience with the collection calls, late penalties, and stress. It is possible to get out of debt.
According to a recent study, late or underpaid invoices affected almost 62% of small businesses in the previous year. These unpaid debts resulted in 38% of respondents saying they had to postpone their payments to suppliers due to late payments.
To ensure they are paid on time, many accounting firms or CFOs thus make the debt collection process a daily priority. You may create a repayment strategy, prevent bankruptcy, and regain control of your finances with options like debt settlement.
Myths about this procedure, however, still exist, which we will debunk soon as you read along.
What is Debt Collection?
Debt collection is the process through which a firm or collection agency seeks to recoup past-due obligations from borrowers. A debt collector may approach you if you still need to pay loan or credit card payments that are critically past due.
You could also be called by a debt collection agency seeking payment for money owing if you’ve co-signed a loan or are an authorized user on a credit card for someone else. Those past-due obligations may include any of the following:
- Medical bills
- Auto/car loan debt
- Debt from personal loans
- Charge-card debt
- debt for student loans
- Unpaid phone and energy bills
Debt collectors are independent businesses that collect on behalf of another company. When a corporation collects debt on behalf of the original creditor, the creditor gives the debt collector a cut of the amount recovered. After you fail to repay the obligation to the original creditor, debt collection companies may occasionally buy out the original debt for pennies on the dollar and pursue you.
BFSI (Banking, Financial Services, and Insurance) firms constantly collect money from individuals, which is outsourced to third-party accounting firms such as IBN Technologies or automated using debt collection software like Growfin. They obtain the banks’ list of payees and handle the collecting activity on their behalf.
There are many myths surrounding these businesses, particularly those that relate to how they function and what they perform. It’s critical to distinguish reality from fantasy regarding this trending issue.
10 Debt Collection Myths You Need to Stop Believing
Myths regarding debt collection might make it challenging to know what to do. We help you learn the truth by dispelling fallacies about debt collection. Here is the information on the top 10 debt collection myths:
1. Since your debts will ultimately “drop off,” why bother?
Many well-intentioned pieces of online sage advise people to ignore debts they cannot pay since creditors are unlikely to take any action, and the problem will ultimately disappear from their credit report.
Even though particular debt, such as credit card debt, may disappear from your credit record after seven years, creditors and debt collection companies who purchase and attempt to collect on debts won’t necessarily let an amount go unpaid. The finest advice for someone in debt is not to ignore it. In the long term, taking timely action can prevent severe issues.
2. Only big enterprises engage in debt collection
Another myth is that only large firms need to use debt collection services. Small businesses typically have a more frequent debt to collect, making them attractive candidates for debt collection firms, even if huge companies may have more outstanding debts to collect.
Profit is essential to all businesses, regardless of size, but only some have internal debt collection experts.
This responsibility often falls under the purview of the finance manager, whether in-house or from an outsourced accounting firm, and is not frequently relished.
However, unpaid invoices should be retained. If you want to have your invoice paid, you must move promptly. Debt recovery organizations may relieve stress, move quickly, and guarantee you receive what is due.
3. It is too late to take action after selling your debt to a debt collector
Creditors frequently sell charged-off debts to debt collectors, who subsequently try to collect from you. Although having a charge-off is a significant bad mark on your credit, some armchair financial gurus may advise you there is little you can do once the original creditor has written it off.
In reality, collection agencies will take tremendous measures to recover the amount, frequently even to the point of suing you. On the other hand, many will also provide payment plans and reduce the balance and interest rate in debt settlement if you’re ready to deal with them. The secret is acting it as soon as possible.
4. It will harm customer relations
Many SMEs often work with the same clients and aim to keep positive, fruitful relationships. Because of this, they are concerned that working with a debt collection firm may sour their relationship. Good debt collection companies are aware of this and take it into account. They recover debts without damaging the debtor’s relationship.
5. The collection won’t affect your credit score if you pay the debt
Your credit score has likely already been harmed before a bill enters collections. You risk doing more harm if you don’t cooperate with a collector. The ideal course of action is to pay your bills on time and stay out of collections completely, but if a collector contacts you, comply and pay or explain your circumstance. A collector’s duty is to settle the debt; therefore, they are probably willing to work with you to make some payment choices.
6. All debtors are safeguarded under the Fair Debt Collection Practices Act
According to Investopedia, the Fair Debt Collection Practices Act (FDCPA) restricts the behavior and activities of third-party debt collectors who are trying to collect debts on behalf of another person or company.
Essentially, the FDCPA shields borrowers against unfair, abusive, or dishonest debt collectors. The FDCPA, however, only covers consumer borrowers; it does not cover business debtors. Although there are presently no federal rules that regulate the collection of commercial debt, the majority of states have legislation that does.
7. You can only bother collecting unpaid balances once an invoice is past due
In reality, debt collection begins before the first contract is agreed upon. An expert debt collector may offer guidance on drafting credit applications, contracts, and bills to make the collection more straightforward and successful. A debt collector may be a vital member of your company team, just like a lawyer or an accountant.
8. You can’t handle debt negotiations by yourself
Some credit repair businesses assert that they alone can negotiate consumer debt. You can get in touch with your creditors on your own if you have debt.
There is no harm in attempting to settle debts with short installments or lower interest rates. Arranging a payment plan and putting your debts back on track could take a lot of work, but generally speaking, you can, with one major exception. Anyone sued or whose wages are being garnished due to a judgment needs to talk with a lawyer immediately. To assist you in constructing a repayment plan, you might contact a nonprofit credit counseling organization.
9. You may settle your debt with the original creditor rather than a debt collector
Many businesses use third-party agencies to collect debt on their behalf. The original creditor no longer owns the debt if they sell it to a collection agency. You cannot ignore the collection agency since it is contacting you for a reason. The good news is that most collection companies make it as simple as possible for debtors to repay their debts. Most provide payment choices, such as a payment plan or an online payment gateway.
10. It will hurt your business and reputation
Working with a firm with different objectives as yours might affect your reputation. However, look for a debt-collecting agency that has glowing testimonials and a solid reputation and will respect your brand and corporate culture. Before you submit any debts to the firm for collection, talk to the staff members. Use a business referred to you by a friend or professional contact. When making a choice, consider openness, honesty, and effective communication.
An example of a Debt Collection Success Story
Most nations have already passed the heights of the COVID-19-driven lockdowns and limitations, but the difficulties of debt recovery during the epidemic persist. As the pandemic-induced recession hits the state finances hard, the International Monetary Fund forecasted that Britons alone would need to borrow more than £400 billion in the next two years. Let’s look at an individual who beat debt collection as an example.
Subject: Ty’Lisha, 32, Houston
Payoff time: 8 years
Upon graduating from college, Ty’Lisha and her spouse accrued a debt of $100,000. With the aid of a financial advisor and Dave Ramsey’s well-known debt snowball strategy, they could become debt-free.
The snowball method prioritizes debt from the top to the lowest interest rate and is comparable to Matthew’s. As soon as they settled the first obligation, Ty’Lisha explained, “we would utilize the monthly allotted money and carry it over to the next bill on the list, paying beyond the minimum necessary until they settled the next debt, and then we went down the list until we were debt-free.
With SpenDebt, an app that adds a predetermined sum to each debit transaction and then delivers that money to the creditor, Ty’Lisha and her husband started assisting other individuals in getting out of debt.
The Importance of the Fair Debt Collection Practices Act
The Fair Debt Collection Practices Act, or FDCPA, protects consumers against the intimidation and threats that debt collectors may make against them. Some strategies are prohibited, such as:
- To force you to pay, they will pose as a lawyer, a member of the police, or someone else other than a debt collector.
- You are lying about the debt, stating that you owe more money than you do or where the loan originated.
- Other dishonest or violent behavior, such as threatening to have you arrested.
You can report detrimental actions taken by debt collectors or anybody claiming to be trying to collect a debt to the appropriate government bodies. This is how:
- File a complaint and contact the Consumer Financial Protection Bureau.
- Inform the Federal Trade Commission of your grievance.
- File a complaint and contact the attorney general of your state.
You can also sue a debt collector for misleading activities under the FDCPA. If you prevail in federal court, the creditor will cover your legal costs and perhaps compensate you for your losses.
Debt Collection vs. Debt Buying
On behalf of the original Creditors, the BFSI corporations who provided the loan, collection agencies only collect or recover the debt from the borrowers. Debt purchasers, however, are distinct from these organizations. Debt purchasers turn into creditors after they purchase the debt.
Debt buyers often purchase a specific quantity of debt at a reduced cost before beginning the collection procedure. The primary distinction is that debt purchasers are the actual creditors and do not collect on behalf of anybody.
Before purchasing a debt, debt buyers conduct a thorough market analysis. Based on that study report, they evaluate their ability to collect the debt within the anticipated time frame to maintain profitability.
Stay Away From These Debt Collection Myths to Grow Now
There are numerous myths about debt collection, the ones mentioned above are only a few of the most widespread. Nearly 56% of firms have recorded writing down more than 1% of revenue and capital loans as uncollectible. Since 2013, this proportion has risen steadily. You may get assistance from debt collection agencies.