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Debt recovery represents different loans and delinquent payments, deriving from past-due consumer and commercial debts. Bad debts are usually connected with a loss, when they are marked as written-off in creditor’s system. Logically, debt recovery is marked as a positive income, and increase of cash flow in lender’s organisation. Default recovery can be provided by a standard debt collection agency, or performed by debt buyers, when they become the new debt owners. Such agents can recover the delinquent amount partly or in full. Potential debtors can be individuals owing commercial or consumer, secured or unsecured past-due payments. Bad debt recovery in all EU countries generally comply with the European Small Claims Procedure (ext. link 1) and the European Order for Payment Procedure, also known as European Payment Order (ext. link 2).
Debt recovery types
Debt recovery is usually carried out by first-party or third-party collection agencies, but it can also be performed by debt buyers. All debt collection agents use wide range of recovery methods and tools to successfully collect behind amounts.
First party debt recovery is executed by creditor’s company and more specific- by its subdivisions and internal finance departments. The name derives from the fact that the original lender is the first party and the consumer (debtor) is the second party from the contract signed between these two sides. Here the creditor does not pay extra for hiring a collection agency, as the individuals in charge for the debt recovery are part of the lender’s company and the collection proceedings are included in their job duties.
Third party bad debt recovery is implemented by a private debt collection agency, which is hired by the original creditor and act on his behalf. Such debt collection includes installation of specialised software, generally known as API. It allows the DCA (Debt Collection Agency) to access debtors’ files and facilitates the collection process. Some creditors prefer this type of bad default recovery, as the procedure is completely transparent and they can follow and monitor the whole debt recovery operation.
Debt buyers invest in default profiles, purchased from the original creditor. Debt buyers pay the lender a portion percentage of the total debt sum and they become the new creditor. After that the debt recovery process commence. A debt buyer can either collect the debts on his own, hire a third-party DCA to perform the recovery process, or re-sell the delinquent profiles to another debt collection agency.
Debt recovery fees
Bad debt recovery includes additional payments for the collection agency, bailiff services, debt recovery solicitors and attorneys, court actions, etc. DCA’s interest rate fee can be inquired from the creditor or the debtor. Laws do not regulate the aspect whether this amount is to be collected from the lender or subject of debt, it depends completely on the collection agency’s policy and terms and conditions. However, the commission fee percentage is strictly regulated by law. In UK and Netherlands a debt recovery agent is not allowed to charge more than 8% on top of the total debt amount. According to European regulations, the base commission fee is again 8% for commercial debts. In Germany and Poland the amount is up to 5% for consumer debts and up to 8% for commercial default payments. In regard to bailiffs, the percentage fee is different for each country. France regulates this interest to be not more than 12% from the whole debt sum. In Germany it is 5%, in Turkey and Belgium- again up to 12%.
Debt recovery strategies
Bad debt recovery consists of various collecting tools. They include tracing and monitoring services, pre-legal and legal actions and court proceedings. Pre-legal methods comprise different communication actions, such as friendly reminder letters, emails, phone calls, even voicemails and fax messages.
If the pre-legal actions are not successful, overdue payments agencies proceed to legal actions: usage of bailiffs, enforcement agents, debt collection solicitors and legal attorneys. Such agents are authorised to perform in-house visits, to seize debtor’s personal belongings and to send different letters of demand and letter before actions. They can also negotiate with the subject of debt in order to recover the full default amount at once or by providing convenient payment plan (weekly, monthly payments). Bailiffs, debt collection lawyers, etc. can also offer the consumer (debtor) to collect part of his property equal to the debt amount, and sell it at auction, as a method for debt settlement.
Bad default recovery can even extend to legal court process. At this point the debt collection process along with debtor’s profile and case is transferred to nation or local court. From this moment onwards the subject of debt is to be contacted only by court attorneys and legal representatives.
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