The three phases of debt collection

There are three overlapping “phases” of debt collection, and we notice most consumers have a hard time sorting out the difference in how to respond to each one.

The first phase is debt-collection communications. A debt collector writes, or more often, calls, trying to obtain payment for a past-due debt. Federal and state laws apply to most debt collection, prohibiting misleading or deceptive communications, and providing a right to recover damages if you have to an abusive debt collector. The debtor can stop or even ignore most debt-collection communication, as the risk of entering the next phase, litigation.

The second phase is debt-collection litigation, where a creditor or debt buyer files a lawsuit to obtain a money judgment or enforce a security interest against collateral. (Think foreclosure here). Time limitations apply here, in the form of a statute of limitations, and court rules govern the methods used during the suit. Federal debt-collection law also applies to misleading, deceptive, or unfair conduct during the litigation. It’s important to respond timely and appropriately, or risk losing by default. This can expose the debtor to judgment executions including wage garnishment and seizure of some assets.

The third phase, which may occur concurrently with the other two, is credit reporting. Unpaid debts may be disclosed on a consumer’s credit report for no more than seven years from the “date of first delinquency,” which is the first time payment was missed and never brought current. Judgments and bankruptcies may be disclosed for up to ten years in most cases. Federal law provides a right to dispute inaccurate or obsolete information, and the right to sue for damages resulting from any failure to properly investigate a dispute.

These three phases often overlap, and the time limits applicable to one may have no effect on another. For example, even though a lawsuit may be time-barred due to the statute of limitations, it is still possible for a debt to appear on a credit report until the seven-year mark.

When drawing up a plan on how to handle debt collection, it is important to consider your goals and constraints regarding each phase, and adjusting expectations accordingly.