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From Collections to Repossession: A Timeline of Debt

ByKiely Kuligowski, Last Modified
Feb 25, 2019
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> Finance

Sadly, Americans are surprisingly financially illiterate. Many people are unsure of where their money is going, how to manage it and how to get themselves out of financial trouble (i.e., debt), which can have serious and lasting consequences down the line.

"Many debtors ignore requests from [their] debt collector … at their peril," said David Reischer, bankruptcy attorney and CEO of LegalAdvice.com.

When you ignore your debt, business or personal, the consequences start to pile up. The bills get bigger, the anxiety sets in, and then comes shame and depression – and that's just the emotional toll. Debt can lead to bankruptcy, eviction, wage garnishment, foreclosure, repossession, ruined credit scores and broken partnerships. But you can arm yourself with knowledge and prepare to tackle the problem head-on.

Business.com talked to debt experts, financial advisors and bankruptcy lawyers to find out exactly what happens to your debt, from delinquency into collections all the way to repossession, and what you need to do right now to begin to work your way out of the red.

Stage 1: 30 days past due

You are behind on your payment. Your lender likely will call, email or send a letter politely reminding you that your payment is past due and should be submitted as soon as possible. The creditor may reach out to credit reporting bureaus to report your account as delinquent.

What you should do

If you know you are going to miss a payment, proactively reach out to your lender. They may be willing to work with you to formulate a payment plan to get you back on track. If you do miss your payment without notifying your lender, contact them as soon as you realize and work with them to create a repayment plan. Do not just ignore calls and letters. This is when you can still easily rectify the situation.

Stage 2: 60 days past due

Your debt is still with your original lender, but contact will become more aggressive and persistent. The creditor will contact credit reporting bureaus to report your delinquent account, if they have not done so already, and you may be accruing penalty fees.

What you should do

It is not too late to contact your lender to work out a payment or hardship plan. Swift, direct contact is your best course of action.

Stage 3: Charge-off status

The debt has been turned over to a collections agency, and your credit report has likely been updated to reflect you are in arrears. The agency will purchase the debt amount for a fraction of the balance due, usually 30 to 35 percent, said Todd Christensen, community financial educator and manager of Money Fit. He advised being proactive and cautious. After the collection agency purchases the debt for a portion of the balance due, it may contact you to collect the full balance.

"[The collections agency] will never tell the consumer that they only paid a fraction of the balance due," Christensen said. "They just notify the consumer of the balance owed and try to collect as much as possible."

What you should do

To avoid a ruined credit score, you should immediately contact your original creditor (lender, medical office, etc.) and try to set up a repayment plan directly with them. This way, said Christensen, the account may be returned from collections and your credit report saved. He recommends you follow these steps once you are contacted by a collections agency:

1. Ask the collections agency to send you verification of your debt in writing. Do not discuss the debt or payment details any further.

2. Contact the original creditor (the lender, bank, doctor's office, etc.) immediately and work with them to set up a monthly repayment plan you can afford.

3. Ask the original creditor if they can get the account back from the collections agency so it will not report to the consumer reporting agencies and affect your credit rating.

4. Make the payments as agreed to the original creditor.

Stage 4: Court

The collections agency has been unable to contact you and has filed a lawsuit. You will receive a court summons, and it is imperative that you attend the court date. If you don't, it will mean an automatic win for the collections agency.

In court, the judge can pass a money judgment, with which "a creditor that is serious about collecting a debt can then take that money judgment and record a lien against [your] home, levy funds on a bank account, or force the sale of an expensive asset," said Reischer. "A debt collector can execute on the lien and have a marshal or sheriff seize the property and arrange for a public sale from which the creditor is paid out of the proceeds."

What you should do

First and foremost, show up to your court date so that you can dispute the debt. Then ask the judge if they are willing to oversee the creation of a repayment plan instead of choosing a lien, wage garnishment or sale of an asset.

Other useful steps to take

The steps are pretty clear, but there are other actions to take along the way.

1. Verify, verify, verify.

Know who you're speaking to. "Never cave to the pressures of a collection call," said Christensen. "If you do not recognize the debt, always ask for verification, and never give your bank information out."

2. Calculate your DTI.

To stay out of debt, Reischer suggested that you calculate your monthly debt-to-income (DTI) ratio. Never take on debt with monthly payments that exceed 40 percent of your monthly income. "A prudent lender will not lend to a borrower when the DTI ratio becomes very high," he said.  "But it is the borrower's ultimate responsibility to calculate their own DTI ratio to determine whether they are able to repay a loan."

3. Understand the FDCPA.

The Fair Debt Collections Practices Act protects consumers from excessive contact by collections agencies, outlining when and how often they can contact you.

Christensen recalled a client who was receiving harassing phone calls from a collections agency she didn't know. The agency threatened her with legal action and personal contact, which turned out to be unsupported claims that violated the FDCPA. That enabled her, together with an attorney, to send a certified letter to the agency demanding it cease all contact.

If you find yourself in debt, remember to stay calm and focus on resolving it as quickly as possible. Your credit score, property and peace of mind will thank you.

Kiely Kuligowski
Kiely Kuligowski
See Kiely Kuligowski's Profile
Kiely is a staff writer based in New York City. She worked as a marketing copywriter after graduating with her bachelor’s in English from Miami University (OH) and is now embracing her hipster side as a new resident of Brooklyn. You can reach her on Twitter or by email.
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