Mastering the Art of Debt Collection: 8 Need to Know Techniques
Debt collection isn't usually enjoyable, but it's a necessary part of any lending institution. Leaving too much outstanding debt out at one time can lead to financial instability and, in the worst case, insolvency. We saw this recently with the 2023 bank failures nationwide, leading to a mini-financial crisis. Unfortunately, becoming proficient at collecting outstanding customer debt is becoming increasingly important. A recent stat found that the total outstanding mortgage debt in the United States amounted to $19.33 trillion in 2023. This is an increase of six trillion dollars in the past ten years alone.
Thankfully, there are strategies to help lenders get back the money they are owed. Continue reading and explore the eight techniques that can help you master the art of debt collection.
Establish Clear Terms and Agreements
Effective debt collection begins with setting clear terms and agreements from the outset. Whether you are a creditor or a lender, it's essential to have a written contract outlining the debt terms, including repayment schedules, interest rates, and penalties for non-payment. Having this documentation in place makes it easier to enforce the debt collection process later. Remember that when contacting the borrower for the first time, it's essential to provide some critical information; otherwise, you may end up with fines.
Open Communication Channels
Maintaining open and respectful communication with debtors is crucial. Start by sending reminders and follow-up notices as soon as the payment becomes overdue. These reminders can be in the form of emails, letters, or phone calls. Make sure your communication is professional and non-confrontational to avoid escalating the situation. It's also important to always follow guidelines set out by the Consumer Financial Protection Bureau.
Offer Payment Plans
In some cases, debtors may be unable to pay the full amount upfront. Offering a structured payment plan can be an effective way to recover the debt over time. Work with the debtor to establish a realistic and mutually beneficial program. Individuals will feel more supported through the process if you provide alternate options and work on a schedule that functions for both individuals. Once a plan is set, clearly outline the terms of the payment plan in writing to avoid misunderstandings.
Understand Debt Collection Laws
Debt collection is heavily regulated by both federal and state laws, such as the Fair Debt Collection Practices Act (FDCPA) in the United States. It's essential to have a thorough understanding of these laws to avoid legal complications. Violations of debt collection laws can result in fines of up to one thousand dollars and substantial damage to your credibility.
Maintain Accurate Records
Effective debt collection requires meticulous record-keeping. Keep detailed records of all communication with the debtor, including dates, times, and content of conversations, as well as copies of written correspondence. Accurate records can be invaluable when dealing with disputes or legal actions.
Offer Settlements
In some cases, debtors may be willing to settle the debt for a reduced amount if they are experiencing financial hardship. Consider negotiating a mutually acceptable settlement and document the terms in writing to avoid future disputes.
Utilize Debt Collection Agencies
Consider hiring a reputable debt collection agency when traditional methods fail to yield results. These agencies specialize in recovering debts and have the experience and resources to do so effectively. However, ensure the agency follows all legal and ethical guidelines, as aggressive tactics can damage your reputation.
Learn more about the advantages and disadvantages of hiring a third-party debt collection company here. (link to the pros and cons debt collection article)
Legal Action as a Last Resort
Legal action should only be pursued as a last resort when all other debt collection techniques have failed. Consult with an attorney to explore the possibility of filing a lawsuit. If the court rules in your favor, you may obtain a judgment that allows you to enforce debt collection through wage garnishment, asset seizure, or other legal means. This can cause more damage and is a riskier option, so weigh the benefits carefully.
What Else Can You Do?
The above debt collection tips and tricks will give any lender a good idea of how to pursue any outstanding payments, but it's only the start. It's essential to use data-gathering tools to not only collect information on delinquent customers but also prevent the need for debt collection entirely.
MicroBilt has been helping business owners and lenders manage their financial risks and providing turnkey debt collection solutions for nearly 40 years. With our suite of Collection and Recovery Tools, you can get top-of-the-line tools for skip tracing, location monitoring, and much more. Our products and services are designed to provide the necessary data to keep you in the loop and get the money you are owed. Contact one of our helpful representatives today.
