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Debt Collection: Definition & Practices

Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

After reading this lesson, you will learn what businesses can do when a bill is unpaid. You will also see that it will negatively impact you if you don't take care of your debt.

Debt

This lesson is about how companies collect debt from those that don't or can't pay. A debt is an unpaid amount of promised money. For example, when you purchase a car, you promise to pay the agreed upon amount. You will get monthly statements until you pay off the car. The car's outstanding balance is your debt. So, what happens if you lose your job and then become unable to make the monthly payments?

Contact

First, the business will try to contact you. In your case, the car dealer or your lender will call you. They will remind you of your outstanding balance and ask that you pay it soon. You may also receive in the mail additional statements with the words PAST DUE on them. They may also mention to you the consequences of not paying your monthly statement.

Debt Collection Companies

The business may send your outstanding balance to a debt collection company. This is a company that specializes in getting unpaid bills paid. These people won't be as nice as the business you did the original purchase with. These people will keep calling you and if you don't respond, they have the ability to add a negative mark on your credit history thus lowering your credit score.

Debt collectors are not allowed to harass you though. This is enforced by the Federal Trade Commission through the Fair Debt Collection Practices Act.

For your car purchase, the car dealer may tell you that he or she is going to send your unpaid bill to a debt collection agency. The amount to be collected may be higher than your last current balance since the car dealer may also have added on late fees.

Repossession

Yet another thing that your car dealer or lender can do is to repossess your car. It's not just cars that can be repossessed, but other items as well. For example, if you don't pay your rent for an apartment, the property owner can repossess or evict you from said apartment.

When a business decides to repossess the product, they don't have to wait a certain period before repossessing the item. They can repossess the item as soon as you are late paying, even if just for one day.

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