Collections is a word that has many different definitions. In the context of “to collect a debt owing”: When we get behind in our bills, these are some of the things that will occur:
A. Lender Collection – a collection department within the lender’s operations may make calls to us, write to us, and threaten legal action if we do not resume paying as we agreed. Sometimes a lender will be understanding for a short time, and seem nice to you. But as time progresses, they can decide to hire an outside debt collection firm to contact you.
B. Hired third party collectors – a lender can hire a third party collection company to collect for them. Sometimes this is a company and sometimes it is an attorney who specializes in collections. A hired third party may begin threatening legal action against you, but they generally have a set period of time that the lender is willing to give them in order to collect from you. If they are unsuccessful, they will return the debt to the lender. At this point, the lender must decide to charge off the debt or begin legal action.
C. Charging off the debt – internally, the lender can “charge off” the debt, which means writing it off and using it as a loss for tax purposes. They may also have insurance to help them recover some of the loss. However, this does not mean that you are off the hook. It simply means that for the present, the lender is claiming a loss. You still owe the debt.
E. Original Creditor Sales of Debts: most of the time, creditors/lenders decide to write off the debt and sell it to a third party collection company. The collection company pays pennies on the dollar for the debt, and once they have control of it, they begin debt collection attempts to recover the whole debt. They may even sue to recover the balance owed.
It is important to understand banking law and how it affects you. When you stop making payments, the credit card company puts you into a state of default. For the next six months, they are required to do everything in their power to get you back on track with your payments.
When they are unsuccessful doing that, most people don’t know that they are required by banking law to make a decision right then about your account: 1) write it off and take the loss; or 2) put this debt into their non-performing category and pursue it through the courts. They look at your credit report, and other reports they have available to them, to determine if you have any assets that they can get hold of. If they think you do, then they may decide to sue you to recover at least part of the debt owed.