Creditors' Rights and Collection Options
When a business's customer fails to pay his or her debts, the business (as a "creditor" to which the debt is owed) has several available remedies to help collect the money from the customer (as "debtor"). These methods include remedies that do not require court involvement (called "self-help" remedies), and remedies that do involve the courts, discussed in more detail below.
"Self-Help" Remedies and Collection Agencies
Many creditors' first attempts at debt collection do not involve the courts. First, the creditor may simply contact the debtor directly and demand payment. If these attempts fail, the creditor may transfer the debtor's account to another business whose focus is debt collection. The practices of these debt collection agencies are regulated in order to avoid abuses. For instance, the Fair Debt Collection Practices Act (FDCPA) prescribes how, when, and where debtors may be contacted, and prohibits deceptive practices. If a debt collector violates the act, the debtor may be entitled to recover damages. The FDCPA applies only to persons who regularly collect debts owed to someone else, but not to creditors collecting their own debts.
Secured Transactions
Other processes, too, are available to increase the likelihood of payment of bad debts. Secured transactions, for instance, are sale or loan transactions in which the debtor gives the creditor a claim to the debtor's property in order to ensure payment of the debt. A secured creditor takes priority over an unsecured creditor if there are competing claims to the property or to the proceeds from the sale of the property. To attain this higher status, however, the creditor must "perfect" its security interest, usually by filing certain required documents. Most consumer transactions are unsecured, but home and motor-vehicle financing usually is secured by the property being purchased. If a car loan is secured and the debtor fails to make the payments, the lender can take back the car in order to cover at least part of the remaining debt.
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