How The Collection Process Works
The collections process is designed to maximize collected debt and resolve outstanding unpaid payments. It favors the lender, not the borrower, and typically follows the steps below.
Step 1: Creditor Sends Out A Notice To The Account Holder
The first step in the collections process involves lenders and creditors formally contacting borrowers or account holders to notify them of the unpaid debt. For instance, if you have unpaid balances, a notice will be mailed to you.
As part of these notices, you will be informed that you may be charged late payment fees for outstanding balances. Unpaid debt that goes unresolved following the receipt of one or more notices may be subject to further action.
Step 2: The Creditor Reports Missed Payments To The Credit Bureau
How do collections influence your credit history? If you fail to resolve outstanding concerns, creditors will report missed payments to credit bureaus, which can cause your credit score to drop. This typically occurs 30 – 60 days after receipt of notice for missed payments is issued.
Step 3: The Account Holder Is Charged A Penalty APR
In the case of missed credit card debt payments, the account holder will be charged a penalty APR − typically after two missed payments, or 60 – 90 days after payments were due. For other outstanding forms of debt, various fixed or variable late payment penalty fees may apply.
Step 4: The Creditor Reports A Default On The Account
Should balances still remain unpaid, the creditor will report a default on the account, generally 90 – 120 days after debts are outstanding.
Step 5: The Creditor Sends the Debt To A Debt Collector
At this point, the creditor will generally hire a debt collections agency to assure borrowers pay any remaining unpaid sums. A debt collector’s role is to help lenders and creditors collect outstanding monies owed to them.
Step 6: The Collector Closes The Account
If debts go unpaid, the collections account will be closed or sold on to a debt buyer. The penalties for having failed to meet your obligations as a borrower will linger on your credit history for years.