Debt collection in a nutshell

Most of us owe money to people for one reason or another. It may be a mortgage, a car, credit card(s), medical bills, student loans, business loans, federal or state taxes, or any other imaginable form of debt. The terms of repayment are 99% of the time memorialized in some form of contract. Failure to make payments as scheduled and agreed upon in that contract will result in default and the creditor may take various actions to recover the funds. Any action to recover these funds in a court of law will generally be for breach of contract. There are different processes for recovering the aforementioned types of debt based on what type of debt was incurred. This guide is no means exclusive of the depth that can be covered in the below debt subject areas, and is merely scratching the surface at the myriad of possibilities that could arise in each particular debt collection circumstance.


If you do not pay your mortgage as agreed, and no hardship exception occurs, then the bank will initiate foreclosure proceedings. More often than not, a standard mortgage contains a clause for foreclosure by advertisement. A judicial foreclosure would be the alternative and that involves filing a complaint for foreclosure with the court, allowing for the court to intervene and decide on the matter.

Foreclosure by advertisement is an expedited process for foreclosure that, unless a challenge arises, avoids the courtroom. The process involves posting four consecutive weeks of notice of a pending sheriff’s sale in the county legal news and serving the defaulted borrower with notice of the sale. The notice that is posted must contain the time and date of the sheriff’s sale and the amount the borrower must pay in full to redeem the property. If the borrower cannot repay the full amount of the loan by this time, then the bank will buy back on the property for what is owed using what is termed a “credit bid”. At this time, the borrower will have 6 months to redeem the property by paying back the full amount plus statutory costs and interest.

Moreover, the bank may also come after the borrower for any deficiency owed to the bank in a court of competent jurisdiction. Further, second mortgages or home equity lines will be foreclosed off of title, but the banks will still come after the borrower for the full amount owed, often times with penalties and legal fees added. This action would be taken in a court of competent jurisdiction, usually the county circuit court because the amount in controversy would be above $25,000. If the amount is controversy is less than $25,000.00, then the action will be brought in a district court in the city of the borrower/debtor.

Student loan(s) or back federal and state taxes.

Federal and State taxes within the last three years of filing, along with student loan debts and other priority claims are not dischargable in chapter 7 or chapter 13 bankruptcy. Of course, bankruptcy would be the last resort for debt relief. However, if a debtor did not file bankruptcy, the federal and state government will nevertheless be very aggressive in finding and recovering your assets. They will levy your tax returns and will attempt to get you to disclose where your work and what your bank accounts are so they can levy your funds. Levy means to assess; raise; execute; exact; tax; collect; gather; take up; seize. Student loan holders will also be aggressive in collection and will take you to court for the failure to pay.

Credit Cards, Medical Bills and other forms of debt collection

In 2014, only 29% of Americans are estimated to have no credit cards whatsoever. That statistic means that 71% of Americans have one or more credit cards. In a land of 300 million people and rising, that amounts to 213 million people in America with at least one credit card. The mean for the average number of credit cards a person with credit cards has is 3.7. If you do not count my debit cards I have 5. So, in the end, there are a lot of credit cards out there. There are also all kinds of other bills including medical bills, contracts between folks, etc…

When someone defaults on a debt and a severe delinquency occurs, there is a timeline that the debt goes through. I found the following example from

  • 1 – 29 days: At this point, you will have missed only one payment. If you can make the required minimum payment before the 30th day, you will avoid credit score damage, as credit card companies do not report this level of delinquency to the credit bureaus.
  • 30 – 59 days: In this case, you’re behind on two payments – one of which is at least 30 days late. Credit card companies will report delinquency, but it won’t hurt your credit too badly.
  • 60 – 89 days: You’re now behind on three payments. One is at least 60 days late, another is at least 30 days late, and the last one is at least one day late. At this point, your credit score will be hit hard. If you previously always paid your bill on time, your score could drop as much as 100 – 125 points.
  • 90 – 119 days: You’re now behind on four payments – the first being at least 90 days late, the second at least 60 days late, the third at least 30 days late, and the fourth at least one day late. Depending on the credit card company, your account could be turned over to collections at this point. Either way, your credit score will continue to drop.
  • 120-179 days: At this point, you’re late on at least five different payments. Collections calls will significantly increase, and the impact on your credit score will be significant.
  • 180 days: When your credit card account becomes 180 days delinquent the credit card company is required to declare your account as being charged-off. Charging-off on an account causes the biggest blow to your credit score. Aside from bankruptcy and foreclosure, a charge-off is the worst thing one can do to their credit worthiness.

At the point of 180 days and beyond, the debt may be sold, and legal action will usually arise by an attorney representing whoever holds the debt. A debt can be contractually assigned to a third party that was not subject to the original contract, the original contract being a credit card application and agreement in the case of a credit card. Often time these debts are sold to third parties at pennies on a dollar. The difficult part is filing a case and then obtaining a judgment; not to mention successfully collecting on the judgment.

To file a court case to collect the judgment, a complaint is filed by the creditor in district or circuit court based on the amount the creditor claims is owed. The debtor is served with the complaint via a process server, certified mail, or other appropriate form of notice such as a notice taped to your door. The debtor, now Defendant, must respond to the complaint or a default would be entered against them. Either way, assuming a judgment is entered against the debtor, the judgment creditor will attempt to seize assets from the judgment debtor. Depending on the creditor and debtor relationship, the judgment creditor may move to seize assets such as a car or other titled personal property, and can garnish wages, bank accounts and state tax returns and lottery winnings. The debt collector as judgment creditor can use subpoena powers to force the judgment debtor to turnover information to discover bank accounts, employment and assets. Installment payment plans are usually a good idea at this point to avoid lengthy, embarrassing, and costly collection proceedings.