Industry Guide

Understanding Debt Collection and Recovery

Debt collection doesn’t have to be difficult — with the right technology, you can optimize recovery efforts while preserving customer relationships

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What is debt collection?

Debt collection is the process by which a company (the creditor) seeks to recover outstanding payments from an individual or other business (the debtor). This process typically occurs when a debtor falls behind on payments. Companies may choose to outsource debt collection to a third-party agency or maintain their own team of collection agents for this purpose. 

Debt collectiors may use various methods to pursue repayment, including sending letters, making phone calls, negotiating payment plans or, in some cases, taking legal action to recover outstanding debts. Companies are increasingly using debt collection software and virtual collection agents to streamline this process.

What are some common examples of debt?

Common examples of debt include:

  • Unpaid credit card balances and associated fees
  • Unpaid medical expenses, such as hospital bills and doctors’ fees
  • Unsecured personal loans that borrowers have failed to repay
  • Unpaid car loans or lease payments
  • Delinquent or defaulted student loans
  • Unpaid mortgage payments, which could lead to foreclosure proceedings
  • Unsettled debts related to business loans or unpaid invoices
  • Unpaid utility bills, such as electricity, water or gas
  • High-interest, short-term payday loans that borrowers have not repaid
  • Unpaid balances on store credit accounts or installment plans
  • Unpaid taxes owed to government agencies
  • Court-ordered payments resulting from lawsuits
  • Unpaid overdraft fees on checking accounts
  • Unpaid premiums, outstanding claims and reinsurance recoverables 

Why is on-time debt collection essential?

It’s imperative that organizations recover debts as expediently as possible, as on-time collection:

  • Strengthens financial stability by helping companies maintain a consistent cash flow. When an organization receives payments on schedule, it can better manage its operating expenses, meet financial obligations and invest in growth opportunities
  • Maintains healthy working capital levels, ensuring that an organization has adequate working capital to cover day-to-day operational expenses, purchase inventory and manage unforeseen costs
  • Reduces financial risks, such as cash flow shortages, borrowing costs, credit risks, credit rating downgrades and operational disruption
  • Improves profitability, as businesses need to dedicate staffing and financial resources to support debt collection — resources that could be more effectively allocated elsewhere. Additionally, the longer a debt remains unpaid, the less likely a business will be able to recover that debt in full, which can have an impact on their bottom line
  • Supports long-term viability and sustainability by ensuring that companies are better able to weather economic downturns, avoid financial risk and overcome external financial challenges
  • Preserves customer relationships. Contradictory though it may seem, following up on outstanding debts in a timely, respectful and professional manner is far less likely to strain customer relationships than prolonged and aggressive collection efforts. Additionally, effectively managing debt collection enables companies to offer their customers more favorable credit terms, which can attract new business and foster loyalty
  • Increases credibility and can help an organization develop a reputation for efficient and ethical debt collection. Customers, partners and stakeholders are more likely to trust in and engage with a business known for its professionalism in financial matters

What challenges do companies typically face around debt collection?

As vital as it is to successful business operations and profitability, debt collection and recovery can also be incredibly challenging. Here are just a few reasons why: 

Regulatory complexity

Debt collectors — whether they’re part of an organization’s collections team or a third-party agency — are subject to certain rules and regulations. For example, the Consumer Financial Protection Bureau’s Fair Debt Collection Practices Act (FDCPA) prohibits debt collectors from harassing debtors or using deceptive practices to recover payments. It also requires debt collectors to provide certain information to debtors, including the specific amount they owe, who the creditor is and that they have the right to dispute the claim.

Failure to comply with this and other regulations can come with severe consequences, such as regulatory enforcement, individual legal action, class-action lawsuits, loss of licensing and reputational damage.

Consumer communications

Regulations such as the FDCPA have a direct impact on how collection agents can interact with consumers, placing heavy emphasis on polite, transparent communication. These requirements should be reflected in organizations’ official debt collection and recovery communication strategies. But honesty and sensitivity isn’t just necessary from a compliance standpoint — it’s also essential to creating a positive customer experience and maintaining relationships with customers well after outstanding payments are recovered. 

Dispute resolution

Under the FDCPA, debtors have the right to dispute debts, at which point collection agencies must cease all attempts at recovery until they’re able to provide proof that a debtor actually owes a debt. Dispute resolution extends the debt collection process, draining valuable financial resources and, in some cases, could lead to litigation or arbitration.

Data management

Most businesses manage large quantities of data, including customer payments data, which they rely on to know which consumers owe what and when. For debt collection processes to run efficiently, companies need an effective way to organize and manage this data and ensure that it’s accurate and up to date — a job that’s often easier said than done.

Economic conditions

Economic downturns and financial crises can cause consumers to default on debts, adding a layer of complexity to debt collection. In the interest of both improving the customer experience and maintaining a positive reputation within their industry, businesses may choose to be more lenient in times of economic hardship and offer customers repayment plans tailored to their particular situation. 

What is debt collection software?

The term “debt collection software” broadly refers to any digital solution designed to help businesses streamline and automate the process of tracking, managing and collecting outstanding debts or payments. 

Though specific capabilities will vary from one solution to another, debt collection software may include the following features and functionality:

  • Business process automation for scheduling and sending out automated payment reminders and requests to debtors, which reduces the need for collection agents to manually follow up. Depending on the platform, an organization may be able to create customized messaging that aligns with their communication strategy and collection policies, as well as debtors’ unique needs
  • A centralized database for managing debtor information, payments history and relevant documents — such as invoices, contracts and communication records — making it easier for agents to stay on top of collections. Certain solutions may even offer tracking capabilities, so that agents can monitor the status of outstanding payments in real time
  • Data analytics and reporting tools, which businesses can use to determine the effectiveness of collection efforts, identify bottlenecks in their process and refine strategies to improve on-time payments
  • Online payment portals with integrated payment processing capabilities, which offer debtors self-service payment options, increasing the likelihood of on-time recovery

Is it better for companies to use automated debt collection software or to work with a collections agency?

There’s no easy answer to this question, as every business’ needs vary; what makes sense for one company might not for another. With that said, any company that currently maintains a team of collection agents, but is contemplating outsourcing debt collection and recovery to a third-party agency in the hopes of increasing efficiency and scalability, may first want to consider debt collection software. 

Debt collection software, such as ACI Virtual Collection Agent, enables companies to supplement — or even completely replace — their existing collections team with automated workflows that they can tailor according to consumer and business needs. In many cases, debt collection software offers organizations more flexibility, visibility and control over the collections process than working with a third-party agency, enabling them to achieve better results.

In addition to using debt collection software, how else can businesses improve debt collection?

Investing in full-service debt collection software is a smart way to optimize debt collection and recovery — here are some ways companies can further bolster their efforts:

  • Leverage predictive analytics to identify accounts most at risk of defaulting on payments, as well as those most likely to repay
  • Communicate transparently with consumers about outstanding debt, providing as much advance notice as possible about upcoming payments, using plain language and delivering messages through multiple communication channels
  • Take a customer-centric approach to debt collection by working with each consumer to understand their unique financial situation and identify suitable repayment options
  • Train collections teams to handle sensitive situations with empathy and professionalism, prioritizing problem-solving over confrontation
  • Offer customers a wide range of payment options and repayment plans; this serves the dual purpose of accommodating customers’ individual financial circumstances and increasing their likelihood of repayment
  • Provide customers with self-service options, so that they can easily access their account, receive notifications about upcoming payments, view details about existing debts and make repayments online
  • Instruct collection agents to document all interactions with debtors, both to ensure compliance and to monitor debtors’ repayment progress
  • Establish an efficient dispute resolution process to address and resolve issues related to outstanding debts

How does ACI Worldwide support on-time debt collection?

ACI Virtual Collection Agent — part of the comprehensive ACI Speedpay solution — emulates the interactions of your best collection agent in a convenient 24-hour online environment.

From a strategy manager that enables you to build customized collection strategies based on rule sets and consumer information to rich reporting that helps maximize offer acceptance rates, ACI Virtual Collection Agent reduces stress for your consumers while increasing the overall consistency and efficiency of your debt collection process.

Learn how ACI Virtual Collection Agent collects almost $2 billion in consumer debt annually for some of the world’s biggest brands

Download our info sheet or schedule a consultation with a member of the ACI team today.