In business, the terms creditors and debtors are used to denote the parties involved with borrowed funds. Creditors and debtors may be individuals, legal entities including public or private corporations, other registered companies or registered organizations. The critical requirement of the creditor-debtor relationship is a debt agreement or contract stating the rights and responsibilities of both sides. If everyone carries out their obligations, both parties benefit from this relationship. Unfortunately, it does not always run so smoothly. Creditors happen to face serious difficulties. Their interests are affected in cases when debtors fail to meet their debt repayments. This is why creditors should be informed about their rights and how they can be exercised and what kinds of services are available to help them deal with different complex situations and maximize debt recovery. Here you will be provided with useful information on the creditor-debtor relationship as well as the offered assistance creditors can rely on to find quick and effective solutions to their problems.
A creditor, also known as a lender, might be a bank, supplier, or individual that provides a monetary loan or goods, or extends credit to a debtor under a repayment agreement including an interest. Therefore, debtors are the borrowers, or in other words, those who owe money to their creditors, with the amount expected to be repaid at a later date (typically agreed beforehand). The creditor-debtor relationship is not much different than the one between a supplier and a customer with the exception that there are different kinds of loans involved. The most common loans granted by creditors are long-term loans, short-term loans, commercial credit, leasing, and bond loans. Creditors are either unsecured or secured. Unsecured creditors are people or institutions lending money without obtaining legally specific assets as collateral. There is always a considerable risk for this kind of creditors, as they could not take any of the debtors’ assets in the case that the debtors are unable to make payment on debt. In such a situation the only option for unsecured creditors to eventually collect their unpaid debts is to initiate a lawsuit. Naturally, secured creditors have lien or other legal claim to the debtor’s assets and often demand a personal guarantee. Since the debtor has more to lose by not repaying a secured loan, the creditor is given more security. A classic example of a creditor is a bank that lends money to approved debtors to set up a business or buy a house. A company that sells goods on credit to another company is also considered a creditor
When borrowers happen to be delinquent on a loan, or put differently, miss a payment or several payments, the creditors have the right to take further actions to get their money back. Debtors first receive a default notice warning from their loan provider informing them that they have missed their due day. They are reminded to make up for the payment as soon as possible and continue to make payments on time or otherwise they would need to face certain consequences. Debtors might be charged an additional penalty fee and interest on the missed payment. If they are struggling to make a repayment, they should discuss their current financial situation with their lender. The decisions that are made depend on the type and the amount of the loan. Sometimes debtors may be allowed to take out a debt consolidation loan or arrange a repayment holiday.
Default debt occurs when debtors have kept falling behind with their repayments and have not responded to the repeated attempts of the loan providers to get in touch with them. The enforcement action of creditors against their lenders is considered completely justified. It includes passing the debt to a collection agency, taking court action, or taking away the property tied to the debt. These are usually the last steps to be taken when all the other methods have not worked. This is why before lending money or goods away, creditors should make sure that their debtors have a good debt management plan.
The reasons for default on a loan are mostly caused by debtors and rarely by creditors. For example, these might be debtor default, non-compliance, credit crunch problems, poor financial and economic conditions, banking and creditor competitive environment, interest rate or exchange rate differences and devaluation. Credit policy to achieve higher and faster profits, lack of experience and bad faith on the part of employees may also have a negative impact on the return on loans. The inability of borrowers to pay their debts is of great concern to creditors. They need to think of an appropriate course of action to try to recover the money owed to them. When debtors are not paying their debts, usually the only choice left for creditors is to spend much time making collection calls and eventually writing off the receivables and taking a loss.
Insolvency arises when an individual or an organization is unable to pay the money owed on time to the lender. Insolvency can lead to insolvency plan proceedings which are a means to restructure a company and enforce debt recoveries by liquidating the assets of the insolvent entity. This is an in-court settlement agreement that does not require the approval of all the parties concerned. Insolvency proceedings take some time and might not always be smooth. If the insolvency plan is carefully arranged in advance, the plan proceedings are likely to be finished within a year, but regular insolvency proceedings normally take a few years to complete. Creditors often have tax concerns directly related to the debtor’s condition and if the restructuring is not successful, they might not be able to fully recover their credits.
When businesses and individuals file for bankruptcy, their assets and liabilities are examined by a judge and court trustee in the court to subsequently decide whether to discharge their debts. If the procedure is successful, debtors would no longer be legally required to pay their debts. Bankruptcy laws are created to give a chance to debtors whose finances have collapsed in order to start over. Filing bankruptcy puts a block on debts to keep creditors from collecting. In this case creditors have a unique set of issues and problems. They normally have a right to obtain some measure of repayment from the debtor who has become the subject of the bankruptcy filing. It depends on the individual’s or the business’s assets available for liquidation. In short, lenders’ only option is to make a claim to the trustee of the bankruptcy estate. Receiving disbursement takes some time and at the end, creditors might receive very little money or come up empty-handed.
Debt collection is the process of collecting payments, owed by individuals or businesses, which have become past due. Companies and agencies that specialize in debt collection are known as debt collectors or debt collection agencies. Most debt collectors are hired by creditors to recover unpaid debts for a fee or percentage of the total amount collected. It is easier and more convenient for loan providers to rather seek help from licensed and experienced debt collectors than chase their clients on their own. The responsibilities and duties of debt collectors include keeping track of slow-moving accounts to identify outstanding debts, establishing a repayment plan, contacting debtors, and negotiating payoff deadlines. The strategies used by debt collection agencies reduce costs, save time, and maximize resources. In order to choose which debt collecting agency is best for their purposes, it is important for creditors to take into consideration the number of accounts that need collecting. If they are below ten, it is advisable to look for a small collection agency. An agency with automated system would be the best option for creditors with small claims. Creditors with large claims should talk to a specialist who is actually going to personally do the collecting. The approach of debt collectors also depends on whether the collection is “retail” (consumer) or “commercial” (collecting against businesses). Some debt collectors are also debt buyers. Sometimes the best solution for creditors to avoid all the problems can be to simply sell the debt out to debt buyers for a satisfying percentage of the face value.
When hiring a debt collecting agency, remuneration is rarely a factor the creditors need to worry about. Nowadays, the services of most debt collectors are typically free of charge. Every good and reliable collection agency works on a “no collection, no fee” basis. This means that the agency goes through their system and does their best to recover the outstanding money for free. If their mission is successful, they would only retain a percentage of the overall amount after both parties have come to an agreement beforehand. This method is known as contingency payment model and is preferred by creditors because of the zero risk of losses and incurring expenses. If they do not win back their money, they have nothing to pay.
Commission when the debt is collected
The percentage retained when debt collection agencies have collected the payments is a small sum of the total amount of the debt. The fee is determined by factors such as the age of the account, its average balance size, the number of accounts the agency has been entrusted with, and the industry served. It is crucial for creditors to have some knowledge of these in order to set realistic expectations. For instance, older accounts generally demand higher fees, as collecting agencies are aware that the older a debt is, the more difficult and challenging its recovery becomes. It is also likely larger percentage to be requested for accounts with smaller balances. On the other hand, the percentage deducted is lower when larger account volumes are transferred.
Some creditors could benefit from membership services. This option is offered by many agencies to save a lot of money of those who need to frequently use a debt collector to either deal with a large outstanding account or other unpaid invoices. In this case, the percentage fee on each individual debt is lower and the creditors pay an annual fee instead.
Apart from passing a debt for a collection to a third-party specialist agency, creditors can also sell it on to a company. This purchase-and-sale transaction is frequently carried out after a specific period has passed and the approaches of the creditors to recover an outstanding amount have not worked. Debt purchasing is becoming more popular with the increasing number of companies that specialize in this kind of business. Debts are purchased by collection agencies, private debt collection law firms, and private investors. This might catch debtors by surprise, as some of them have not paid much attention to a clause in their contract according to which the lender is allowed “to assign their rights” to another individual or an institution. These are known as assigned debts. Once the debt purchasers have assessed the situation and decided that a debt is worth collecting, they make a bargain and keep pursuing the debtor in their attempts to win back the payment. The original lenders lose their right to claim any payment from the debtors and the money is owed to the assignees. The outright sale of debts includes portfolios such as credit cards, personal loans, telecommunications, mortgages, retail debits, etc. They are normally sold either through singular transactions or more regular and long-term agreements. It is important for creditors to be conscientious and provide all the necessary information to the buyers, including the type and the character of the debt as well as a background of the client’s financial condition and reasons for non-payment.
Purchasing default debts
The default payment is believed to be very difficult to recover and practically loses its original value. However, there are specialised debt buyers who would be interested into executing the debt purchase. Under this kind of circumstances, debt buyers might propose the original creditor to purchase the written-off debt by paying out a percentage of the overall debt amount. This sum is seen by the seller as a profit and revenue. The buyer turns into the new credit owner and is legally permitted to collect the default payment in full. The debt buyer has the rights of the original lender which means that if the debt repayment does not go smoothly, they are authorized to make an application to a court.
Thinking of a course of action when creditors are facing unpaid debts and insolvency can be difficult with all the factors that should be taken into consideration: costs, legal issues, and chances for success. Fortunately, they could take advantage of the opportunity to consult a lawyer on matters related to delinquent and default debts, insolvency plan proceedings, and bankruptcies. This type of matters is often complex and requires efficient handling. It is important for creditors to choose attorneys who communicate with them about their legal matters, who guide them through the process, and who make sure that they are comfortable with every action. Good advice is focused on rescue, recovery, and restructuring, and would eventually develop strategies that increase the chance for a return to liquidity. Thanks to their ability to pay the needed attention to the specific aspects of different cases, experienced lawyers are likely to resolve the above-mentioned matters to a successful conclusion.
Lawyers whose practices are focused on commercial law and creditors’ rights deal with the settlement of claims asserted by one individual or company against another. There are normally two types of claims, commercial claims and retail claims. Commercial claims can be defined as an obligation which has occurred as a result of the procedure of conducting business which arises from selling or leasing goods, rendering services, or lending money for use in the conduct of a business or profession. Commercial accounts are not all based on open account balances, but there are also claims based on lease agreements, security agreements, consignment transactions, guarantees, or on numerous kinds of similar business transactions. Experienced attorneys are aware of the available means to check claims for their legality and how such specialized types of claims could eventually be collected. For this purpose, they are well informed about creditors’ rights from sales, secured transactions, and negotiable instruments to enforcement of judgements, and civil procedures.
Judicial dunning is the procedure of taking a court action in order to collect the accounts. Skilful lawyers initiate the judicial dunning procedure and permanently assist their clients before the procedure, during it and up to the completion of the required actions. They could help creditors avoid long-lasting court proceedings by using out-of-court methods to foster the debtors to recover the past due debt. These efforts are known as prejudicial or out-of-court proceedings. During the prejudicial phase the lawyers still directly communicate with debtors. They investigate the financial standing of the debtors and either send them a dunning letter with a deadline or contact them in a different way to demand payment.
If the demand letters and phone calls requesting the payment with all the interest and costs to be made within a few days have not worked, there are other ways. Debt recovery lawyers have in-depth knowledge of the legal proceedings. The extra-judicial phase is often associated with announcement of the intention of the attorneys’ clients to take legal actions. It is likely to convince debtors to effect payment. This is how lawyers show debtors that creditors are willing and capable of enforcing their rights.
Judicial dunning procedure involves a court order, or in other words a letter from court that informs the debtors that the creditor is taking a legal action for real. Lawyers carry out the whole dunning process. They intervene in court proceedings and keep their clients informed of their progress as well as of the chances of success of the causes of actions presented in the court.
The majority of people who file bankruptcy are honest and report all assets. However, this is not always the case. Some debtors engage themselves to fraudulent actions, the most recognized forms of which are concealing assets, making false statements, providing false documents, and paying someone to help hide property from the court. Fraud is not always directly connected to the bankruptcy filing. It could happen at an earlier stage. For example, obtaining credit under false pretences, falsifying financial documents, and taking part in deceptive business practices are also considered fraudulent actions. The purpose of the perpetrators is to hinder, delay, or defraud creditors. In these situations, creditors should consult a knowledgeable bankruptcy attorney or criminal defence attorney. Good lawyers require from debtors to disclose all the important financial information including their income, properties, and prior transactions. They protect creditors from frauds or if they happen to be suspicious of such, provide them with the needed information and let them know what options are available to them based on the facts in their particular case. Debtors whose fraudulent intentions have been revealed and proved face harsh consequences. The punishment depends on the type and severity of the fraud, but they might be obliged to pay very high fines or be sent to prison for years.
Last but not least, when hired by creditors, lawyers can play the role of mediators and help them negotiate out-of-court settlements. Mediation is an alternative resolution procedure that allows the parties involved to come to a mutually beneficial agreement and avoid further litigation. The advantages of mediation are the possibility to potentially settle the matter, circumvent the filling of any lawsuit and avoid court costs, legal fees, and time investment. Mediators greatly increase the prospects for resolution by serving as buffers against the contentious positioning and arguments that appear as serious obstacles in the case of direct negotiation. The wide range of disputes the lawyers have the competencies to resolve includes complex financial situations between creditors and debtors and corporate restructurings. Lawyers can prepare and offer the debtors a payment plan that has been previously approved by their clients and use their negotiation skills to satisfy the demands of creditors. Real experts are also able to implement mediation in insolvency proceedings and use alternative dispute resolution methods in favour of their clients.