An Overview of Creditors’ Rights Part One: Customers Who Fail To Pay Their Debts

Businesses of all sizes find themselves in a difficult situation when a customer fails to pay their debts. But finding a solution to the problem does not require court participation and can be solved using what are known as “self-help remedies.” Keep reading to learn more about self-help remedies, secured transactions and court-based remedies.

Collection Agencies and Self-Help Remedies

In debt collection circumstances, the business is referred to as the creditor and the customer is the debtor. The creditor’s first attempts at debt collection often don’t involve the courts and instead are as simple as contacting the debtor and requesting payment. The creditor may choose to transfer the debtor’s account to a business that focuses on debt collection if making contact proves unsuccessful.

If a creditor employs a debt collection business, it is important to note that the actions of these debt collectors are heavily regulated to avoid abuses. Certain laws may dictate how, when and where debtors may be contacted and forbid deceptive practices. The debtor may be able to recover damages if a debt collector acts against such regulations. These laws usually apply only to persons who regularly collect debts owed to a third party rather than creditors personally collecting debts.

Secured Transactions

A debtor may give the creditor a claim to the debtor’s property during a sale or loan transaction to ensure the debt is paid—also known as a secured transaction. A secured transaction can be particularly beneficial when considering that secured creditors take precedence over unsecured creditors if there are opposing claims to the property or profits from the sale. If a creditor wishes to be secured and reach this status, they must file necessary documents to “perfect” their security interest.

Home and motor-vehicle financing are examples of transactions that are often secured, due to the property that has been purchased. If a debtor finds themselves in a financial situation where they must default on their payments, for example, the lender has the right to repossess the car to cover the remaining debt. Keep in mind that the majority of consumer transactions are not secured.

Court-Based Remedies

Creditors may also choose to move forward with court proceedings to collect an outstanding debt from a debtor. In extreme cases, such as emergencies, the creditor may have the ability to take possession of the debtor’s property prior to the court settling the case. Due to their extreme nature, these tactics should only be used when other methods have been unsuccessful, when perishable goods are involved or in cases where collateral is at risk of rapidly declining in value while in the debtor’s control.

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