What Is the Legal Process for Credit Debt?
The legal process for credit debt exists in three stages that progress based on the age of the debt and its size. Creditors will use several avenues to recover monies owed, but a process must be followed.
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In-House Collection
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When credit debt becomes delinquent, the debt is handed off to the collections department within the creditor organization. This is known as in-house or first-party collections, since the collectors are trying to collect on their own behalf for the direct benefit of the creditor. No law states specifically how long a debt must stay in first-party collections, so this is usually at the discretion of the creditor. Also, the creditor does not have to notify the debtor in writing before moving the debt to first-party collections.
Outside Collections
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If attempts through in-house collections prove unsuccessful, the creditor may decide to send the debt to an outside or affiliate agency. This is known as second-party collections or affiliate collections. The outside party is a company that works on behalf of (and may be owned by) the creditor and receives a percentage of the debt collected for the creditor. A second-party agency is required by law to notify the debtor by mail prior to any phone calls, and provide their name, license information, amount of debt and the creditor name. A second-party agency can recommend litigation, but the creditor must approve it.
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Third-Party Collections
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If the second-party collector cannot get the debtor to pay, they may recommend to the creditor that the account be moved to third-party collections or litigation. A third-party agency takes on debts that have been uncorrectable through the first two stages. They usually work with a law firm. They tend to be more aggressive in their collection methods, and often threaten legal action and send nasty letters. Despite what a third-party collector says, the debtor has the legal right to approach the original creditor and attempt to settle the debt.
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