In simple terms, the cost incurred to recover a defaulted loan/ debt through a legal process is called Collection Cost.
What does it include?
- Commissions for Collection Agency.
- Fess for Attorney.
- Court-oriented Expenditure.
- Telephone Calls.
In many cases, the Collection Agency simply adds a flat fee rather than dissected expenses.
When an individual opts for borrowing money/ credit, he/she usually sign an agreement to repay the money borrowed, with interest. All the agreements include strict provisions outlining the consequences which the lender may take if the borrower doesn’t pay the debt as per the Contract.
In the same Contract, it is usually laid down that the lender will bear all the costs in attempting to collect the unpaid debt.
How will a lender identify a defaulter?
One late payment doesn’t lead the creditor to declare the loan in default.
Generally, two consecutive payments need to be missed to declare the borrower as a defaulter and trigger the collection process.
How does the entire process work – Example of Collection Cost?
After labeling the borrower as a defaulter, the creditor sets up a contract with a Collection Agency.
The Collection Agency keeps a track of the incurred expenditures involved in collecting the debt through the legal process.
Next, if the Collection Agency fails to retrieve the debt/loan, the lender will step in and refer the case to an attorney.
The attorney will further use the threat of a lawsuit to persuade the borrower regarding payment. Generally, the attorney has the right to negotiate with the debtor. Note that the amount under negotiation is the total amount owed to the lender including the collection costs.
If the case drags to the court, there remains no room for negotiation for the payments. Moreover, if the lender wins the case, the court orders the debtors to pay the entire amount owed to the lender including the attorney fees and court costs.