This is an introduction to collections, charge off, repossession, and the current debt cycle that many good people are finding themselves in. It will be a generalization of the rules and laws as they differ from state to state.
Let me start with my credentials. I have been a collector for the last 14 years. I have worked first party and third party files (the difference between the two will be described herein). The accounts I have worked have ranged from five days past due to 10 to 20 years past charge off. I have worked commercial, Small Business Administration, and consumer accounts, specializing in skip tracing, recovery, bankruptcy, foreclosure, repossession, liquidating the collateral, and litigation. I have called all 50 states and all of the U.S. controlled territories along with some foreign countries. I have personally repossessed everything from pens and pencils to major construction equipment along with foreclosures on personal and business property.
In my years of work I have enjoyed the many times I have been able to help someone find a way out of financial trouble. That is the most satisfying part of my job.
The difference between first party and third party collections.
· First party is where the originating financial institution maintains and services the bad account.
· Third party is where the bad account is transferred to an outside company for servicing. This can happen in two ways.
1. The originating financial institution transfers the bad account for outside servicing without selling it. The original financial institution maintains control of the account but merely lets the new outside servicer make contact splitting every penny collected between the two companies.
2. The originating financial institution sells the bad account to an outside collection agency for generally $0.01 to $0.55 on the dollar depending on the average age and balance of the bad accounts. These are generally sold in what is called portfolios and involve up to hundreds of millions of dollars of bad accounts at a time.
It must be noted that many originating financial institutions have formed their own third party agencies to service the bad accounts with the originating financial institution while operating under a different name, so they can squeeze out every penny before they transfer or sell the accounts.
Moving on to the collections cycle.
The collections cycle begins at five days past due. Your account will be included on a list that a collector will review. We will take many factors into account before we attempt to make contact.
· The age of the account.
o If it is a first payment default it will be worked harder than an account that is halfway through its term length.
· If the account is secured or unsecured.
o If the past due account is a personal loan, credit card, or any other form of unsecured debt it will be worked harder than a secured loan i.e. auto loan, boat loan, house loan. There is more to lose with an unsecured loan as there is nothing to repossess.
o Secured loans are worked and lien position is verified. A good collector will generally know where the collateral for the secured loan is at this point.
At 10 to 15 days past due late fees are assessed to the account. Every financial institution has late fees written into all contracts. It is the bread and butter of the financial institution. Late fees and other service fees keep the lights on and bills paid.
· If the account was deemed to be low risk and has not had a payment credited to it will be called now. Late Payment Notices will be mailed out. Files will be reviewed for any information pertaining to the debtor.
· It is important that the debtor be contacted now. As a general rule if an account slips further past due the chances that they will never get current increase greatly every day that goes by and the account remains delinquent.
· Higher risk secured accounts will receive a personal visit. Pictures will be taken of the collateral and questions will be asked of the debtor. If possible, arrangements will be made to bring the account current.
Personal contact with debtors can be dangerous. I have had one gun pulled on me, threatened with physical violence, almost attacked by dogs, spit on, and yelled at. I understand that the debtor is mad at the situation so I don’t take these things personally. When I have to make face to face contact I have to go with a calm demeanor. I feel that my attitude and actions will direct a possibly hostile event to be a calm and friendly time. I am not there to make the debtor feel bad or embarrassed. I am there to merely talk and see what is going on so I can help solve the issues before it goes any further. It is better that the loan goes through its life cycle and pay off than charge off, although there are profits to be made if the account charges off.
At 16 to 30 days past due repossession is considered. Repossession depends on risk rating--each financial institution has a risk based lending practices. Where each loan is scored on the credit score, past loan history on the credit bureau, and other condition to come up with an (I feel) arbitrary score that may or may not predict the chances of delinquency--collateral condition, amount owed, and the ratio of the estimated value of the collateral and the amount the debtor owes.
Default letters are sent asking that the debtor bring the account(s) current within a set period of time, generally 15 days depending on state laws.
Skip tracing intensifies if no contact has been made. Most of us have done web searches on our own names. It is harmless to do so and should be done to see what is linked to you. I will “Google” you and use other free web sites to try to find you.
If I am unsuccessful with those web sites I will move on to the not publicly available web sites. These sites are paid for by the financial institution and contain enormous amounts of information. These sites list your information-including your SSN, your relatives' info, neighbors info, past neighbor info, past addresses for you, your spouse, your family, current and past work info, what assets you have, any legal info-lawsuits, family law, bankruptcies, foreclosures, etc.
Between the information gained from public web sites, nonpublic web sites, and your application I can correlate and get new phone numbers and addresses. Cell phones can be found also so don’t think that those are private, yes even the ones bought at Wal-Mart and other retailers can be found.
***A quick side note, don’t use the grocery store discount cards they sell all the information you give them when you sign up to the non public web sites plus they track what you buy and who knows if they give it to Big Brother or not. Hospitals are another source that can and will sell your information.
If your account is unsecured the credit line may be suspended at this time. Any related accounts may be restricted and inaccessible.
The option of Set Off may be exercised at this time. This means that if you have money in savings it may be applied to the past due loan to make as much of the payment as possible. You will receive a letter called either Notice of Action Taken or Notice of Adverse Action describing the amount and date of the Set Off.
At 31 to 60 days past due the debtor is now due for two full payments going on three. Chances are very likely that the account will not recover at this time. Most debtors will have to rob Peter to pay Paul now. To add insult to injury more late fees are added to the account. Also, if it is written into the contract, the Default Interest Rate will be applied to the account. Default Interest Rate can be as high as 35% depending on your state laws.
Demand letters will be sent. The debtor will have between 10 to 15 days to bring the account current depending on state law.
The financial situation for the debtor is very serious and bankruptcy is an option now. From what I have seen, debtors that have one account reach this stage have multiple account that are in the same state or going to be in the same state very soon. A major disruption to the debtor’s financial situation has happened and they need an immediate intervention to save their finances.
I will be pulling your credit report now. What I am looking for is new credit lines, addresses, employers, and credit inquiries. By the time the debtor is 31+ days past due they have been in a financial hardship for around 60 to 90 days prior to reaching 31+ days past due. Financial problems don’t just pop up. They build up over a long period of time. Small setbacks build up over time and snowball into the huge burden that faces them at this point. I will be able to see a pattern of delinquency on your credit report. Also I will be able to see which bank(s) you are paying. This lets me know what you hold as important in your financial world.
This is the point in time when desperation takes over the debtor. They start applying anywhere and everywhere for a loan to get them out of the situation. This is also where banks deny the debtor credit because of current delinquency on the credit report, a vicious Catch 22. And so starts the spiral of payday loans. Payday loans and short term loans are no better than loan sharks and should be avoided at all costs.
You cannot borrow your way out of debt.
If there is collateral securing the loan generally it will be assigned for repossession. The financial institution will hire a third party to locate and secure the collateral. Once the collateral is secured the debtor will receive a letter giving them 10 days to pay off the remaining balance of the loan. If the loan is not paid off then the collateral is sold. The sale-depending on state laws- can either be a private sale where the financial institution sells it directly to another person or public sale such as an auction. After the sale the Recovery process starts. Recovery will be explained below.
Unsecured loans are prepped for charge off now. All information about the debtor is gathered and the information is reviewed with management. The decision to charge off an account is made here and the debtor’s account will be assigned a date to be charged off.
There is a world of difference between WRITTEN OFF and CHARGED OFF.
· "Written off" means that the financial institution has forgiven the debt and will not be pursuing the deficiency balance. If this happens to you get it in writing that they are forgiving the debt.
· "Charged off" means that financial institution has moved the loan from a performing loan to a non-performing loan on the financial institutions accounting books. The debt is still owed.
At 61 to 120 days past due the debtor’s account(s) are past the point of no return. While I have seen debtors come back from this point, it is a rare occurrence.
At 61 days past due the debtor owes two past due payments + late fees and one current payment. If the debtor has a car payment of $350 a month, at 61 days past due he owes a total of $1050 ($350+$350+$350) + late fees just to bring the account current.
The accounts are generally charged off by the time they reach 120 days past due regardless of if the collateral is repossessed or not.
The debtor’s checking and savings accounts may be Set Off and closed to recoup some of the charged off balance.
If the debtor has filed Bankruptcy generally the debt life cycle ends here. There are instances where collections can continue and that explanation deserves a different letter.
I do not fault anyone for filing Bankruptcy. It is allowed by law and should be used to reset the debtor on the right path. The stigma of the past is gone and people are not looked down upon as much now as they were in the past. I advocate that if the debtor is with one of the “Too Big to Fail” banks that they do file bankruptcy.
The Recovery process starts at this point.
The Recovery Process starts immediately after the account is charged off. The debtor has already had his credit bureau report pulled so there is an idea of where the debtor stands financially. After all the Skip Tracing and the collateral has been repossessed the financial institution now has the debtor’s new address and possibly his employer.
Contact is then made with the debtor. Payment arrangements will be offered although the remaining deficiency balance is now due in full. Remember the account is now Charged Off. It is no longer a performing loan on the financial institution’s books. The financial institution has reported the account to the State and Feds as a loan that is no longer on the books-in essence the defaulted loan may become a tax write-off.
Every penny the financial institution collects now is profit. Depending on the debtor’s state laws interest may still be charged. Again the balance in full is due now. Financial institutions don’t have to ask for payments. If the financial institution chooses to they can sue you for the balance. The financial institution will incur legal fees, which will be added to the deficiency balance making it greater. If they win in court they will seek a monetary judgment and garnishment.
In my former state of residence, somewhere in the Redoubt, the maximum garnishment rate was 35% of each paycheck until the judgment is satisfied (paid in full). Try to live with an income that has been reduced by 35% each paycheck if you are already struggling. Pull out your last pay stub and subtract 35% from it. It turns out to be quite a sum.
If the financial institution deems that it is not economically sound to sue the debtor they can choose to service the account as an internal collection account (First party collections) or transfer or sell the account to an outside collection agency (Third party collections).
In first party collections the charged off account is serviced in-house for six months to one year. After that if the charged off account is not paid, then it is sold or transferred to an outside collection agency.
Welcome to the murky world of Third Party Collections.
Third party agencies are governed by the FAIR DEBT COLLECTIONS PRACTICES ACT (FDCPA) and various other federal and state laws.
Largely the third party agencies follow the preceding acts and laws. If they don’t, they are financially liable for any damages that take place if they are sued. The fines start at $1,000 and can go through the roof. Along with this the individual collector can be held financially responsible. Some third party agencies have had fines in the $100,000+ range.
A collector with a third party agency is supposed to recite what is called the Mini Miranda when they contact the debtor (This is _name_ with _company name_ a debt collector. This is an attempt to collect a debt any information obtained will be used for that purpose). If they don’t it is a violation of the FDCPA and can be used against them in court.
Third party agencies are up against the clock for initiating a law suit. Each state law is different pertaining to the Statute of Limitations of debt. The Statute of Limitations only limits the amount of time a financial institution can initiate a lawsuit against the debtor. The Statute of Limitations does not limit the amount of time that the debt can be collected on. Hence why “Zombie Debt” is a catch phrase in the media.
Debts that have exceeded the Statute of Limitations and have also fallen off the debtor’s credit bureau are still collectable. The Statute of Limitations restarts every time there is a payment made on a “Zombie Debt”. So if you have a “Zombie Debt” and a collection agency calls I recommend that you do not make a payment. As always seek legal counsel and get a professionals opinion about this debt.
Third party agencies will try anything and everything to get you to pay. It is their job to keep you talking and stumble into making payments. Legally, you don’t have to (As always seek legal counsel and get a professionals opinion about this debt). Morally you should. It is up to you to make that choice.
If the charged off account is not paid on it will be sold to another third party agency. This cycle will continue forever. Like I said I have called on accounts that were close to 20 years old.
Some notes on charged off accounts:
If you have fallen on hard times (I have) and have had an account charge off (I have), don’t feel like it is the end of the earth. If you can, make payment arrangements with the original financial institution. They will probably be more lenient at this point.
If you can’t, and the original financial institution does not sue you, be prepared to receive a lot of calls. You can choose to ignore them or talk to them. Remember third party agencies are paid a wage plus a bonus for each dollar collected.
A little suggestion for the third party agency calls;
· Record them if it is legal to do so.
· While on the phone with the collector be courteous and pleasant. Let the collector be the aggressor.
· Do not let them bully you.
· Do not let them argue with you.
· Do not let them call you names.
· They cannot, if the account is outside the Statute of Limitations, threaten to sue and garnish you.
· There is no such thing as a Debtors Prison. You cannot go to jail for a debt unless you committed fraud. As always seek legal counsel and get a professionals opinion about this debt
My personal views on charged off accounts:
Bad things happen to good people.
As a collector I try to understand what happened that caused the account to charge off. For the most, part people are well intentioned and mean to pay for what they buy or incur through other means. I will treat you with all respect that you deserve. You are still a brother or sister under God and I have a responsibility to treat you kindly.
Bankruptcy is a personal choice. The world we live in today does not look down on it as much as they have in the past. I do not fault you for using a legal means to get a fresh start on life. You would be surprised how much the pile of debt weighs on you and how liberated you feel after the bankruptcy is over. Just please learn your lesson and don’t do it again.
I have had hard times and fallen behind on my bills too. I am human and make human mistakes.
I'll close with an inside joke: Debt collectors are some of the hardest people to collect from. We know the rules of the game.