From Collections to Repossession: A Timeline of Debt

What is the debt collection process?

While business owners can have a healthy level of business debt, debt collection is the process of obtaining payment on a past-due account. Types of debt include common business costs like utility bills, medical credit cards, SBA loans and civil judgments. The multistage debt collection process varies depending on the creditor, but it usually includes phone and mail notices, stoppage of services (if applicable), notifications to credit reporting bureaus, assignment to third-party collection agencies, and potential court proceedings. Ignored debt can have catastrophic results and should be mitigated as soon as possible.

>>Learn More: Debt Payoff Calculator

“Many debtors ignore requests from [their] debt collector … at their peril,” said David Reischer, a bankruptcy attorney and CEO of LegalAdvice.com.

The debt collection process can begin as soon as a scheduled payment is missed, but it typically takes effect by the time the payment is 30 days past due. Here is a breakdown of the four main stages of the process.

Stage 1: 30 days past due

In this stage, you are behind on your payment. Your lender likely will call, email or send a letter politely reminding you that your payment is past due and should be submitted as soon as possible. The creditor may reach out to credit reporting bureaus to report your account as delinquent.

What you should do: If you know you are going to miss a payment, proactively reach out to your lender. They may be willing to formulate a payment plan to get you back on track. If you do miss your payment without notifying your lender, contact the lender as soon as you realize you missed the payment and collaborate on a repayment plan. Do not ignore calls and letters. During this stage, you can still easily rectify the situation.

Stage 2: 60 days past due

During this stage, your debt is still with your original lender, but their contact with you will become more aggressive and persistent. The creditor will report your delinquent account to credit reporting bureaus if they have not done so already, and you may be accruing penalty fees. [Read related article: How Much Small Business Debt is Too Much?]

What you should do: It’s not too late to reach out to your lender to work out a payment or hardship plan. Swift, direct contact is your best course of action.

Stage 3: Charge-off status

Now, the debt has been turned over to a top collection agency, and your credit report has likely been updated to reflect that you are in arrears. The agency will purchase the debt amount for a fraction of the balance due, usually 30 to 35 percent, said Todd Christensen, a community financial educator and manager at Money Fit. He advised being proactive and cautious. After the collection agency purchases the debt for a portion of the balance due, it may contact you to collect the full balance.

The collection agency “will never tell the consumer that they only paid a fraction of the balance due,” Christensen said. “They just notify the consumer of the balance owed and try to collect as much as possible.”

What you should do: To avoid a ruined credit score, immediately contact your original creditor (e.g., the lender, medical office, etc.) and try to set up a repayment plan directly with them. This way, Christensen said, the account may be returned from collections and your credit report may be saved. He recommended following the below steps once a collection agency contacts you.

1. Ask the collection agency to send you verification of your debt in writing. Do not discuss the debt or payment details any further.
2. Contact the original creditor immediately, and work with them to set up a monthly repayment plan you can afford.
3. Ask the original creditor if they can get the account back from the collection agency so the creditor will not report the delinquency to the consumer reporting agencies and affect your credit rating.
4. Make the payments as agreed to the original creditor.

Stage 4: Court

At this point, the collection agency has been unable to contact you and has filed a lawsuit. You will receive a court summons, and you must attend the court date. If you don’t, it will mean an automatic win for the collection agency.

In court, the judge can deliver a money judgment, with which “a creditor that is serious about collecting a debt can then take that money judgment and record a lien against [your] home, levy funds on a bank account or force the sale of an expensive asset,” Reischer said. “A debt collector can execute on the lien and have a marshal or sheriff seize the property and arrange for a public sale from which the creditor is paid out of the proceeds.”

What you should do: First and foremost, show up to your court date so you can dispute the debt. Then, ask the judge if they are willing to oversee the creation of a repayment plan instead of choosing a lien, wage garnishment or sale of an asset.

Other useful steps to take during debt collection

The most beneficial actions, all outlined above, should be clear, but there are additional wise steps to take before and during the debt collection process.

1. Verify, verify, verify.

Know whom you’re speaking to. “Never cave to the pressures of a collection call,” Christensen said. “If you do not recognize the debt, always ask for verification, and never give your bank information out.”

2. Calculate your DTI.

To stay out of debt, Reischer suggested calculating your monthly debt-to-income (DTI) ratio. Never take on debt with monthly payments that exceed 40 percent of your monthly income. “A prudent lender will not lend to a borrower when the DTI ratio becomes very high,” he said. “But it is the borrower’s ultimate responsibility to calculate their own DTI ratio to determine whether they are able to repay a loan.” [Watch out for hidden gotchas in your loan repayment terms.]

3. Understand the FDCPA.

The Fair Debt Collection Practices Act (FDCPA) protects consumers from excessive contact by collection agencies by outlining when and how often they can contact you. Christensen recalled a client who was receiving harassing phone calls from a collection agency they didn’t know. The agency threatened the client with legal action and personal contact, which turned out to be unsupported claims that violated the FDCPA. That enabled her, together with an attorney, to send a certified letter to the agency demanding it cease all contact.

Debt collection FAQs

What happens to your credit when you don’t pay your debt?

Having a past-due account for any length of time can damage your credit, but the severity varies depending on the amount and type of debt, as well as what your score was to begin with.

Several factors determine your credit score. The amount of debt you have accounts for 30 percent of your overall score. Unpaid debt is especially problematic, as it can lead to higher interest rates (among other things) in future lending situations because lenders will have reduced confidence in your ability to make timely payments. Accounts in collections will appear on a credit report for seven years plus 180 days from the time the account became delinquent.

How long can a debt collector attempt to collect a debt?

The length of time a creditor may attempt to obtain payment varies depending on where you live and the type of debt being collected. Although the account may appear on a credit report for seven years, the creditor (or its representatives) could continue to solicit reimbursement long after.

The statute of limitations on a debt is the length of time a creditor has to file a lawsuit for past-due accounts. Again, these guidelines vary by location but could range from three to 15 years from the time nonpayment began. The national average is between three and six years. In some states, the statute of limitations may reset if a person acknowledges a debt and/or makes a partial payment while the account is still in collections.

What is debt settlement, and what are the risks?

Debt settlement is the act of negotiating a lump-sum payment of less than the amount of the original deficit in order to settle an account. Debt settlements are usually facilitated by for-profit companies that work on the client’s behalf to arrange remittance. While debt consolidation and debt settlement can be attractive options, settlement does come with some risks.

Debt settlement companies typically require you to stop making payments to creditors if you’re already doing so. Instead, clients make payments in a designated savings account for up to 36 months, and that account is then used as a settlement. This process can backfire in that it may negatively affect your credit because of nonpayment to your original creditors, who could initiate a separate debt collection action. Also, credit bureaus have an unfavorable view of debt settlements since the debtor ends up taking a loss on the original debt.

Additionally, many people find it difficult to make regularly scheduled deposits. As a result, they often exit debt settlement programs altogether, thus setting them back further. There’s also the risk that the company will be unable to secure a settlement agreement with the original creditor even if the client successfully makes all required payments.

What do I do when a debt collection agency calls?

The first call from a debt collection agency can elicit panic. Try to remain calm and compliant to ensure a smooth process. First, ask the caller to verify their information and the debt they are collecting. Request specific details, such as their contact and company information. If they refuse to provide this information, do not proceed with the call; if they do provide it, ask them for some time so you can verify it. Do not disclose any of your personal information until you are certain they are who they claim to be.

Once you verify all the information, ask further questions about the debt they are collecting so you can identify whether there has been a reporting error or a potential case of identity theft. You can contact the original creditor to verify the collection is actually coming from them.

How do I know if I’m being scammed by debt collections?

Unfortunately, many scammers pose as debt collection agencies to steal your information. To determine whether a debt collection agency is legitimate, look out for common warning signs, such as the collector impersonating a government agency, threatening legal action or arrest or demanding immediate payment over the phone. Any aggressive or forceful interactions should be a red flag.

To protect your personal information from debt collection scammers, never provide Social Security or bank account numbers over the phone, and be wary of unsolicited calls or emails requesting personal information. If a debt collector requests personal information and payments from you, have them verify their own information, such as their name, company, address, phone number and professional license number. If they refuse or provide false information, do not disclose any more details about you or your business.

Sean Peek and Rachelle Gordon contributed to this article. Source interviews were conducted for a previous version of this article.