Debt Collection vs. Debt Recovery 

While many may use the terms debt collection and debt recovery interchangeably because they both relate to collecting unpaid debt, these terms have their own distinct meanings and processes. Collection is when a company seeks late payments from clients, and recovery is when the company reaches out to a third party to receive help recovering the debt. 

This guide explains everything you need to know, from the key differences between debt collection and debt recovery to examples, legal compliance and the different strategies for collecting debt.

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Understanding Debt Collection

Let’s say you missed a payment on a product or service a company expects you to pay. Personnel from the company then contact you via email, letter or phone to remind you about the money you owe. This is what debt collection is. 

Companies need to get customers to pay their outstanding money because it may slow down their cash flow and harm their reputation. Many large companies have a department that deals specifically with collecting outstanding debt after an invoice is still unpaid after 30 days. These professionals need to handle the situation in particular ways to stay compliant with ethical debt collection laws and regulations. 

The debt collection process begins with the business evaluating its accounts receivable, which is the money customers or clients must pay the company on a particular date in the future. If it remains unpaid 30 days after the due date, the business may incorporate a strategy to collect the money. These strategies may sometimes include a dunning letter providing notice to a consumer that their payment is overdue, helping the company prevent delinquent accounts and collect outstanding receivables. 

Exploring Debt Recovery

Let’s say the company contacts the consumer several times regarding their overdue payment and still has issues receiving their money from the customer. In these situations, the business may benefit from contacting a reliable third-party organization to act on behalf of the company to recover their unpaid money. Recouping debt through third-party services is commonly known as debt recovery. 

Debt recovery differs from debt collection in how it affects the consumer. For example, the third-party debt collection company will record their contact with the consumer, and their debt may impact their credit score. Customers who owe money must ensure they respond to debt collection agencies because ignoring them may only work against them if they end up going to court regarding their debt. 

Debt recovery methods begin with the business enlisting the collections agency, which will report the debt to credit agencies or credit bureaus, contact the customer to verify their identity and establish a suitable payment arrangement. If they come across issues doing so, they may pursue legal action to receive the overdue payment with the company’s permission. 

Key Differences Between Debt Collection and Debt Recovery 

While debt recovery and debt collection aim to reach the same solution (which is to recover overdue payments), key factors set these processes apart:

• Professional involvement: While debt collection involves in-house company professionals negotiating with the consumer to receive their money, the debt recovery process involves the assistance of reputable agencies with specialized expertise and knowledge to request the money and handle legal proceedings according to the law. 
• Stage of the process: The initial step of collecting unpaid money is debt collection, which requires careful communication and negotiation to receive the money. In contrast, debt recovery occurs after collection efforts are ineffective and may require legal action to enforce repayment. 
• Methods used: Debt collection aims to influence voluntary payment through communication, negotiation and persuasion. Debt recovery aims to get customers to repay their debt through legal action and enforcement measures. 
• Legal procedures: In many cases, debt collection may avoid pursuing legal action unless the client voluntarily refuses to pay their debt. Most debt recovery strategies will involve legal processes such as beginning a lawsuit, executing enforcement measures and obtaining judgments. 

Factors Affecting Debt Collection and Debt Recovery

Various factors may affect how companies and debt collection agencies are able to recover debt, whether that be the type of debt they’re dealing with, the consumer’s financial circumstances or the different legal considerations. Let’s see how these aspects can change the negotiation methods and processes. 

Types of Debt Companies Can Recover During the Collection or Recovery Process 

The type of debt a consumer has is a common factor that may impact the collection or recovery process and how certain bills are handled. Here are a few types of debt that qualify for recovery and collection: 

• Personal loans 
• Credit card balances 
• Auto loans (even after someone repossesses the vehicle) 
• Government, law enforcement and court fees and fines 
• Medical bills 
• Bank fees and overdrafts 
• Utility bills 
• Student loans 

When a customer has unpaid past-due debt, companies or collectors may alert the consumer through phone calls or written notices. Let’s consider this example of how the debt recovery and collection processes may differ. If a consumer were to owe money on a student loan and negate paying it, in some instances, the debt collector may use their file information to view personal banking information from savings and investment accounts. This will allow them to determine whether they have the means to repay the debt. 

Another example of how the type of debt one has can impact the recovery process is that collectors may be able to add late payments on utilities, medical providers and other services to their credit score even though these types of payments would rarely appear on your credit report. 

The Effect of Consumers’ Financial Circumstances in Collection and Recovery 

Whether it’s the company trying to collect their overdue payment or a debt collection agency, the strategy for attaining these funds will always differ based on the customer’s financial situation. This is why communication with this client or customer is essential to get an idea of how they can pay off their debt in a convenient way for both parties. 

For instance, they may contact the consumer and discuss the outstanding balance and why they are having issues paying the amount. They may then explore the different payment options based on their conversation. Possible reasons a consumer’s payment hasn’t gone through include: 

• The customer has cash flow issues and may benefit from a payment plan. 
• The goods or services failed to meet the consumer’s expectations. 
• The invoice differed from their expectations. 
• The consumer’s accounting system had an issue processing the payment. 

Legal Factors to Consider During Collection and Recovery 

One of the most important considerations is compliance with the Fair Debt Collection Practices Act (FDCPA). This act outlines the specific information dunning letters should include, the times companies or debt collectors may contact the customer and other laws to comply with. Some of the general legal factors in the FDCPA that require compliance include: 

• The FDCPA prohibits debt collectors from discussing a consumer’s debt with any loved ones, employers or neighbors. 
• Debt collectors and companies must avoid using insults, slurs or threats. 
• If consumers wish for debt collectors to cease contact, the FDCPA may provide remedies to stop it. 
• Collectors must verify debt and end collection procedures.

Concerning communication with the consumer, additional laws are in place, including: 

• Debt collectors may only contact the customer between 8 a.m. and 9 p.m. unless the consumer says otherwise. 
• Companies and debt collectors must stop contacting consumers via text message or email if the customer requests it. 
• If the consumer is only permitted to receive calls outside work hours, the debt collector or company must comply with this rule. 

There are some other legal factors to keep in mind when businesses or debt collection agencies create a dunning letter. It should include specific information such as: 

• The name and address of the company or creditor that should receive the payment 
• The amount of the debt owed 
• That the sender will assume the debt is valid if the consumer avoids responding to the letter or message within 30 days of receiving it 
• That the debt collector will provide the name and address of the original creditor if the customer requests it 
• That the debt collector will send verification of the debt if the consumer disputes the outstanding payment 

Best Practices for Debt Collection and Debt Recovery

If you’re a company looking for better strategies to help you recover debt, there are numerous ways you can streamline processes and improve communication with consumers while staying compliant with the relevant laws. Here are six practices you can try during the debt collection process and beyond:

1. Apply the Most Effective Communication Techniques 

During debt collection, you want customers to feel like they want to find a way to pay you. Show consumers your flexibility when it comes to communicating paying off debt to improve customer engagement during this time. 

Many people may only be able to take calls outside of work hours, and while many may prefer a letter or phone, others may prefer an SMS or email. Pay attention to your customers’ personal profiles and personalize communication times and channels according to their preferences to enhance the chances of debt repayment.

2. Negotiate With the Decision Makers 

An important negotiation strategy to keep in mind is to only negotiate with the person who has the authority to make decisions. For example, you may find it best to speak with the consumer or their lawyer directly rather than a bookkeeper. 

You can also try renegotiating a consumer’s debt if you know they are going through an unexpected turn of events, such as a business crisis or the loss of a family member. This means you’ll either arrange a more approachable payback schedule or slightly reduce the amount they owe you. 

3. Use Technology and Data Analytics 

There are technologies that can take over the simple tasks in the debt collection process and automate them, and they could influence higher repayment rates better than a repeated threatening call. Some artificial intelligence (AI) solutions and chatbots have the ability to choose the appropriate times and channels to reach out to consumers about their repayment. Other technologies may even offer data analytics to monitor and score consumers’ accounts receivable to help them avoid potential risks. 

4. Avoid Threatening Consumers 

One of the most important things you can do is avoid threatening the customer. This is a prohibited action, according to the FDCPA, and consumers can take legal action against the company if this happens. Instead, while portraying urgency, speak in a way that will encourage the consumer to stay positive and discuss the debt more calmly and professionally. Once you have come to a decision, confirm the agreement in writing or by email so you can refer to them in the future. 

5. Be clear About Rights and Obligations 

Another factor that may be significantly beneficial is informing your consumer of their rights and obligations as someone with outstanding payments. You may also explain to them why this matters to you and what your company’s obligations are so if the situation requires recovery later, the process is more straightforward, and consumers are well aware of their rights. 

6. Work With a Third-Party Partner 

If your debt collection process is unsuccessful, work with a reputable third-party recovery agency to help you recover your funds. These organizations are well aware of all the compliance and collection laws, and they have effective debt recovery strategies to help protect your cash flow and brand reputation. 

Examples of Debt Collection and Recovery Communications

Now that we know the legal factors to consider and best practices to implement, let’s get you started on debt collection. Here are a few effective examples of debt collection letters you may send to any consumers with outstanding payments: 

• General notice letter: This is the initial letter you’ll send to inform the consumer about their missed payment. Start this letter with information about who they owe money to and lead with the amount, deadline and how to pay the amount to make it easier for the reader to pay without facing the penalty. 
• Required validation letter: To prove that the consumer owes the company money, send them a letter specifying the amount owed, who the money should go to and that they have the right to dispute the debt. This is mainly necessary if you give the initial notice in a call. 
• Payment plan option: The third letter you’ll offer after negotiation is a letter stating a payment plan option they may use to pay the full amount to help them decrease their debt over time. 
• Final demand before legal action: Your final option will be to send a demand letter that informs the reader that it is their final chance to pay before you pursue legal action. 

Solve Debt Collection and Recovery Issues With Southwest Recovery Services 

Debt collection and debt recovery are equally important processes that require effective strategies and compliance with government regulations to recover payments owed to a company.  

Are you having debt collection issues? We encourage you to work with a capable and professional debt collection company like Southwest Recovery Services. Our experts offer creative recovery solutions on a contingency basis — meaning you’ll only need to pay us if we get your consumers to repay you! For assistance from a certified third-party collection company, contact Southwest Recovery Services today!