Dos and Don’ts of Debt Collection can save a debtor from making a mistake, and enable a creditor to collect their debts.
Are you in a situation where debt is a significant part of your life or income? You may be wondering what action to take and what to avoid in these situations.
It is recommended to pursue legal advice specific to your situation, but some basic background knowledge can ensure you get the best result from your debts or the debts you are owed!
What is a Debtor
A debtor, as defined by the English dictionary, is:
“someone who owes money.”
Dos of a Debtor
In relation to the dos and don’ts of debt collection, there are a number of things that you should do if you are a debtor.
Talk to your Creditor
Informing your creditor that you are unable to pay debts in time can result in them taking action to assist you in negotiation, such as extending due dates, creating payment plans, or even lowering your debt.
Creditors will generally have a variety of options for individuals in your exact situation.
An open conversation with your creditor may also avoid them taking legal action against you in the future, as they may be aware of your situation and confident that you will be honest about your finances!
Seek a professional to assist
Depending on your situation, it may be beneficial for you to seek professional help in a business such as a lawyer or financial councillor.
A financial councillor is a professional in assisting those with low income and may offer free services to assist those who cannot afford to pay.
They can help you with topics such as saving and budgeting. If it fits your needs, a lawyer may be able to assist you in negotiating with your creditor or making you aware of the legal aspects behind debts and debt collection.
If you are in a situation of low income or high debts, budgeting your finances may be beneficial for you! Budgeting is the process of showing and controlling all income and generally limits money spent unnecessarily.
It is important to budget responsibly and ensure that your essentials are not pushed aside for the purpose of saving money, however!
Don’ts of a Debtor
In relation to the dos and don’ts of debt collection, there are a number of things that you should NOT do if you are a debtor.
Don’t ignore the problem
Ignoring your debts is unwise and can result in negative impacts down the track!
Some make the mistake of ignoring their debts, declining phone calls from creditors, and leaving letters unopened.
This lacks progression and will not make your debts disappear and will likely negatively affect your finances.
If you are actively unable to pay debts, ignoring them is likely to simply irritate your creditors and cause them to be harsher with negotiations or consequences when the inevitable comes.
Don’t borrow more money
Furthermore, it is also unwise to take more money out, to repay debts or otherwise.
This will likely result in an increase in debt and will further damage your financial situation and credit score if you are unable to repay.
It is recommended to refrain from credit card use, as they are a form of debt. You may want to cancel credit cards if it is appropriate for your situation.
While in debt, you generally want to avoid borrowing money that is unnecessary for your finances.
Don’t miss due dates
If you can avoid it, it is highly recommended to avoid missing due dates while in debt.
Debts will generally come with a late fee, meaning if you miss a payment, you will be required to pay extra to your creditor.
This may result in you entering further debt and payments piling up on you over time.
It is wise to pay your debts on time to the best of your abilities and, if you cannot, have a conversation with your creditor about negotiation options.
What is a Creditor?
As stated by the English dictionary, a creditor is:
“someone who is owed money to.”
Dos of a Creditor
In relation to the dos and don’ts of debt collection, there are a number of things that you should do if you are a creditor.
Be open to negotiation
When pursuing debt recovery, it is generally beneficial to your business to be open to negotiation with your debtor.
Debtors may be unable to pay you back in time and an open negotiation allows them to be clear about their position and for a sustainable plan to be set up to receive the money back you are owed.
This may also benefit your reputation as a business, as you will be viewed as fair and willing to communicate with clients in a civil manner.
Maintain records on clients
Make sure you keep all documents involved in the payment and recovery of debts such as invoices, emails, etc.
This will ensure if matters escalate to court, you have sufficient evidence to prove your debts and ensure your money is returned to you.
Make credit checks
Before entering a debt with a client, ensure you do a sufficient check of their credit and financial history.
This can prevent you from entering into a contract with a client who will be unable or unwilling to repay you the money they borrowed.
Hire a debt collection agency: Some make the error of assuming that taking action on the recovery of debts will be more financially efficient than hiring a debt collection agency.
This is often not the case, as those trained in the debt collection industry can recover your debts more efficiently than simply pursuing debtors yourself.
Furthermore, the investment in funds following up debtors without the guarantee of receiving your debts is always an active risk, a risk decreased by those trained in tactics and methods of recovering your unpaid debts.
Don’ts of a Creditor
In relation to the dos and don’ts of debt collection, there are a number of things that you should NOT do if you are a creditor.
Don’t ignore the problem
It is recommended to avoid waiting on debtors to return debts or not follow up with them when they miss payments.
Although this may be obvious, you as a creditor may have a large corporation or simply a busy schedule and forget or don’t bother following up with debtors when they miss payments. Studies suggest that the likelihood of you being repaid decreases over time, so it is important you take the time to contact debtors if they miss payments!
Don’t harass or threaten your debtor
It’s important as a creditor to remain professional and refrain from harassment or threat when a debtor misses a payment.
Remember to avoid tactics such as repeated calling, taking advantage of your debtor, or using methods of physical threat to receive payments.
Not only is any of these actions damaging to your reputation as a debtor but can result in charges pressed against you in court.
There are laws on creditors in Australia and using any of the above methods can result in punishment!
Don’t attempt to collect debts without knowledge of laws
As aforementioned, debt recovery is a complex process and there are laws and restrictions on the practice.
Before attempting to recover debts, make sure you are aware of the restrictions in Australia.
Violation of these regulations can result in debtors taking legal action against you, so you must be aware of your responsibilities before entering into the process of debt recovery.
The process of paying or recovering a debt is important, so it is vital you know your rights and responsibilities.
It is highly recommended that you seek the advice of a professional before taking action of any sort as a debtor or a creditor, but knowing the appropriate behaviours and actions is always helpful!