Monday, May 5, 2014

Defaulting on an Unsecured Loan

When a credit card payment is past due, the borrower will receive a friendly reminder from the creditor. At that point, a late fee has typically been applied to the account as a penalty to encourage the borrower to bring the account current by paying the past due amount. Assessing that penalty can also trigger a clause in the credit agreement allowing a rate increase by the creditor, and if reported to the credit bureaus, the threat of a universal default arises.

If payment is still not received by the creditor after 30 days, the creditor's collection efforts take a more serious approach known as "dunning." Dunning occurs when creditors actively pursue debtors through relentless communication to ensure collection of an accounts receivable. Typically, this phase includes calling the borrower multiple times a day at home and work, mailing or emailing demand notices for payment, or threatening to revoke the credit line. When an account is past due more than 120-180 days, the debt is written off and turned over to a collection agency or attorney under one of two arrangements. Usually, a creditor will sell the debt outright to a collector and end its involvement in any further collection efforts unless named as a party in a subsequent lawsuit. Alternatively, the creditor can retain ownership of the debt and the services of the collection agency or attorney are contracted with specific provisions defining the collection process.

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Collectors under contract to the debt owner cannot vary from the conditions stated by the creditor, including any limitations on accepting partial payments from the debtor. For example, some creditors won't allow collectors to settle accounts under $1,000, or they can't settle for less than 60% of the balance. The collectors cannot file suit or accept a non-conforming settlement offer without the approval of the original debt holder. Whether working under contract or as the new debt owner, the collector begins a similar "dunning" process involving mass communications. The objective of the collectors is to locate the debtor, communicate the payment demand, and secure payment as fast as possible. Analysis shows that time is a critical factor in the likelihood that a collector will successfully collect the debt. The longer the default period, the less likely it is that the debt will be collected. The time factor also affects the value of the debt when purchased from the original debt holder by the collector, or subsequently resold.

Collectors evaluate each new account and prioritize the collection effort it will receive. They consider the amount of the debt, any other obligations of the debtor, and his or her financial circumstances to estimate the odds of successfully collecting the debt. The delinquent account is assigned a high or low priority. If the collection agency purchased the debt but fails to collect, either it is packaged with other debts for sale to another collection agency at a deeper discount or the company's attorney determines that a lawsuit would be the better option. If the collection agency only contracted its services to the original creditor, that company's attorney will discuss the account with the collection agency to determine whether filing a lawsuit can secure payment.

The decision whether to sue is primarily based on the amount of money owed, how much it will cost to sue, the debtor's current financial situation, and the attorney's assessment of the creditor's odds of winning the lawsuit and collecting a judgment. Filing a lawsuit does not constitute an automatic win for the creditor, nor does it ensure that a judgment will be granted against the debtor. The debt owner, therefore, must thoroughly review all facts and carefully plan the legal procedures to pursue.

If the creditor wins the lawsuit at trial or if it's not challenged, the creditor will be granted a judgment by the court against the debtor. With the judgment, the creditor can proceed to levy non-protected property that the debtor owns and has the right to immediately garnish wages. The debtor has a right to dispute the creditor's rights to collect, but can incur additional legal and collection costs if unsuccessful. Costs incurred by the debt owner can be added to the debtor's balance owned and include court filing fees, collection costs, attorney fees, and the annual interest rate that accumulated during the default period. The determination of the total judgment amount awarded and which property owned by the debtor can be subject to levy is determined by the judge.

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