Dealing with debt isn’t always easy. Yet estimates suggest that around 27 million people in the UK have some form of debt, with roughly 9 million having between £2,000 and £10,000. But what happens when you can’t make repayments on these debts? That’s when what’s known as the debt recovery process begins. We take a look at how this process can unfold, as well as some frequently asked questions about the topic.
What is debt recovery?
Before we get into the specifics of the debt recovery process, let’s first look into what the term actually means. Although it seems fairly straightforward, there are some important distinctions to make. As we’ll see, there is a difference between debt collection and debt recovery, for example.
Essentially, debt recovery is when a creditor takes further steps to reclaim money that they’re owed. Often, this means that they’ve already tried and exhausted several options to recover the debt. So, if you have a debt and haven’t paid it, it’s unlikely that the creditor will go straight to the debt recovery phase.
If you continue to avoid repaying or contacting your creditor, they may go beyond just letters and calls as they try and recover their money. Once the debt recovery process is initiated, it can have some fairly serious consequences. However, before things reach this stage, they’ll likely take the option of debt collection instead.
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The debt collection process
The debt collection process starts when you miss a payment on money you owe. This could be on something like a loan or credit card. Once this happens, there are several steps that a creditor might take:
Send a reminder
When you miss a payment, the first thing your creditor will do is usually to try and contact you about the missed payment, often by phone or post. At this point, may organisations will be quite calm about the process – after all, people do sometimes forget payments are due. You may even get several such reminders for your first couple of missed payments, depending on how long/big the outstanding debt is.
Letter before action
In many cases, creditors will issue you what’s known as a Letter Before Action (LBA). Essentially, this is a formal request that you pay the debt within a certain time period, often around 7 days. Usually, this letter is accompanied by the threat of further court action – a company cannot make a legal claim against you without offering an LBA first.
Debt collection agency
In some cases, a company will pass your account over to a debt collection agency to chase. This can be either an external organisation or internal department that specialises in pursuing unpaid money. Often, companies will use this as a last resort, however others have an automatic process in place if you miss a payment. Once a debt collection agency gets involved, things can start to escalate fairly rapidly, and the debt recovery process usually begins.
The debt recovery process
Once a company has tried to collect the money that they’re owed without success, they will move onto some of the next steps of debt recovery. These can have some serious consequences if they continue to progress, so it’s worth knowing about how they work:
A default notice
If your debt is regulated by the Consumer Credit Act and you miss several payments, you’ll likely get a default notice soon. After this is issued, your account will default unless you pay what you owe. In this case, your credit file will be negatively impacted, making it far harder to get credit in the future.
Accounts closed
Lenders will likely stop lending you money at this point. If you have a credit or store account, the company you have it with will probably close it. Often, this is the step where businesses will send or sell your debt to a debt collection company.
Court action
If you continue to avoid debt collection agencies and don’t reach out to your original creditor, they may decide to take legal action against you. Usually, this happens after you ignore an LBA letter. Creditors can take you to court, seeking a CCJ (County Court Judgement) against you. Again, this can seriously impact your credit rating.
Bailiffs
If you refuse to pay after a CCJ is issued against you, the court may send an enforcement agent (bailiff) to your home. They have the legal power to seize your belongings, including your vehicle, to cover the cost of the debts you owe.
Further action
If you continue to avoid repaying at this point, a company can take further legal action against you. You may have to appear in court to defend why you’re not paying. In extreme circumstances, you could even face a jail sentence.
FAQs
If all of that sounds fairly serious, try not to worry. There are plenty of solutions when it comes to managing your debt and making repayments. Below, we’ve answered some of the most popular questions people ask about the debt recovery process:
Where can I get help?
There are several charities and organisations that provide help to those struggling with debt. StepChange is a good place to start, as is National Debtline. You can also check out Citizens Advice for information and support.
What if I can’t afford to pay?
Often, your creditors will accept a repayment plan if you organise it with them. This can include small monthly payments until the debt is paid off and can help you avoid the more serious consequences.
If your debts are out of control, you can check out some of the debt options for getting help and writing off some of what you owe. An IVA or similar could be the right choice, depending on your circumstances.
What if I’m treated unfairly?
If a creditor or debt collection agency harasses you or treats you unfairly, you have a right to complain. Initially, it will have to be dealt with in-house by the company. However, if they don’t resolve the matter, you can refer it to the Financial Ombudsman Service for mediation.