Key Terms About Business Debt Collection and Delinquency
Dealing with debt collection can be a confusing and stressful process, especially for business owners who are unfamiliar with the system. This article will explain some of the key terms and laws around business debt collection and delinquency, to help you understand your rights and responsibilities.
The Debt Collection Process
Once an account becomes delinquent (more than 60 days past due), the original creditor like a supplier or vendor can decide to assign or sell the debt to a third-party debt collection agency. This is usually around 90 days after nonpayment. The creditor does this because the chances of collecting the debt significantly decrease the longer it remains delinquent.
-The debt collection agency then steps in to collect payment on behalf of the original creditor. Their goal is to get as much of the owed money back as possible, through legal means. The debt collector will attempt to contact the debtor business through phone calls, emails, letters, or even personal visits.
If the business still refuses to pay after repeated contact attempts, the collector may threaten legal action like filing a lawsuit. If they obtain a court judgment against the debtor, the collector can then pursue options like wage garnishment or seizing assets to satisfy the debt.
The entire debt collection process can take anywhere from 4-6 months on average. Accounts in collections remain on the debtor’s credit report for 7 years plus 180 days from the time the account first became delinquent. This impacts their credit score and ability to get financing.
Key Laws Around Debt Collection
There are federal and state laws that provide certain protections for consumers and businesses facing debt collection. Here are some of the major ones:
-Fair Debt Collection Practices Act
The FDCPA is a federal law that prohibits debt collectors from using abusive, deceptive, or unfair practices when trying to collect debts. Some key protections include:
- Limiting how often debt collectors can contact you – usually not more than 1-2 times per week.
- Requiring collectors to identify themselves and notify you of your right to dispute the debt.
- Prohibiting harassment, threats of violence, profanity, or calling before 8 AM or after 9 PM.
- Banning false statements or misrepresenting the amount you owe.
- Prohibiting collectors from contacting third parties like your employer or relatives about the debt.
- Requiring written notification if the debt is assigned to a new collector.
- Allowing you to opt out of being contacted by a collector.
Violating the FDCPA can result in collectors being fined or sued. Debtors can receive up to $1,000 in damages plus reimbursement for attorney fees if a lawsuit is successful.
State Debt Collection Laws
Many states have their own debt collection laws that provide additional protections beyond the FDCPA. For example, some states extend the FDCPA to cover original creditors collecting their own debts. Or they may require licensing for debt collectors, or have stricter limits on contact frequency/methods. Check your state’s specific statutes.
Telephone Consumer Protection Act
The TCPA restricts when and how collectors can contact you by phone, including:
- Requiring consent before calling your cell phone using an auto-dialer or leaving prerecorded voicemails.
- Allowing you to revoke consent orally or in writing.
- Limiting calls to 1 per week after requesting no further contact.
- Banning calls before 8 AM or after 9 PM local time.
Fair Credit Reporting Act
The FCRA regulates how debts can be reported to credit bureaus and investigated. Key protections include:
-- Requiring collectors to accurately report debts, including timely updates if you make payments.
- Allowing you to dispute inaccurate or unverified information, which must be reinvestigated.
- Removing settled debts from your report if you request.
- Prohibiting reporting of debts older than 7.5 years.
Strategies for Dealing with Debt Collectors
If your business is facing debt collection, here are some tips to protect your rights:
- Request validation of the debt – Collectors must provide this within 5 days of your written request. Make sure the amount and details are correct.
- Dispute inaccurate debts – You can dispute incorrect amounts or fraudulent debts not owed by your business. The collector must investigate and verify.
- Negotiate – Offer partial lump sum payments or a reduced settlement amount if possible. Get any agreements in writing.
- Know your rights – Educate yourself on debt collection laws and don’t hesitate to report illegal practices.
- Prioritize debts – Focus on paying priority debts like taxes first if unable to pay all. Let collectors know if you need more time.
- Avoid ignoring calls – Communicating respectfully can help, but don’t feel pressured into agreeing to anything.
- Seek legal help – For harassment issues or if sued, consult a lawyer regarding your rights and defense options.
- Consider bankruptcy – If debts are overwhelming your business, bankruptcy may be an option to discharge them.
The most important thing is not to panic. There are protections available, and being proactive can help resolve debts in an acceptable manner. Seek assistance if you are unsure how to respond to a collector. With the right approach, your business can get through debt collection smoothly.
Common Debt Collection Terms
Here are some other key terms that may come up during the debt collection process:
-- Charge-off – When a creditor writes off a delinquent account as a loss, charging it against earnings. The debtor still owes the debt.
- Judgment – A court ruling that formally establishes the debtor’s obligation to pay the debt. Allows collectors to pursue repayment through garnishment.
- Garnishment – Legal process allowing collectors to seize wages or assets to satisfy a debt judgment. Certain exemptions apply.
- Levy – Related to garnishment, a levy is a legal seizure of property to be sold in order to pay off a debt judgment.
- Statute of limitations – The period of time creditors or collectors have to sue to recover a debt, varies by state – usually 3-6 years.
- Zombie debt – Debt that is beyond the statute of limitations but gets “reanimated” by collectors suing or threatening action.
- Pay-for-delete – An agreement where the collector removes a debt from your credit report in exchange for payment. Rarely granted.
- Validation notice – Required written notice collectors must send identifying the debt details within 5 days of first contacting you.
- Cease and desist letter – Formal written request for a collector to stop communicating with you. Does not cancel the debt.
- Debt buyer – Company that purchases delinquent debt accounts from creditors for a fraction of the amount owed. Then tries to collect.
Conclusion
Dealing with debt collectors is often described as a “game of inches”—small wins like correcting errors or negotiating settlements add up over time. Understanding the process and your rights is key. Don’t hesitate to push back on questionable collector practices. With patience and persistence, you can take control and protect your business.
This overview covers the basics around business debt collection and related terminology. Remember to document all communication, stay calm, and seek assistance if you have concerns. There are resources available to help business owners through the process while safeguarding their legal rights.