There are a number of tactics that creditors can legally use to collect money owed to them. One of the most common procedures employed by creditors is to turn the delinquent account over to a collection agency. These agencies are businesses that earn money by collecting debts. They usually receive accounts by one of two ways: the creditor forwards the debt to the collection agency and agrees to pay a percentage of any amounts successfully collected; or the creditor sells the debt with the right to collect on it to the agency, who can then keep all that they’re able to collect. The agents that work for the collection company generally do so on a commission basis, which makes them highly motivated to get the debtor to pay what’s owed. Many people view collection agencies in a bad light, considering them unscrupulous money gatherers; however, the law quite specifically regulates the collection practices of these agencies.
A wage garnishment can occur when a court of law enters a judgment against a debtor and the creditor is allowed to receive a certain portion of funds which are automatically taken out of the debtor’s salary. This can be confused with, but is vastly different from, a wage assignment, which takes place when the debtor agrees to have part of his or her pay sent directly to the creditor. Beware of this, because many creditors will attempt to get debtors to consent to this method of payment. Garnishments will never occur without the debtor’s knowledge, because court papers must be served and a court hearing must be held before any wage garnishment can be ordered.
A foreclosure takes place when a bank takes back possession of real property (land and the improvements on it) when a debtor defaults on his or her mortgage payments. It’s usually a long, costly process and the last thing that banks actually want to do. Foreclosed and repossessed homes are generally sold by auction for an amount less than their value, with the former homeowner financially responsible to the bank for any difference between the sale price and the amount of the outstanding loan.
When a creditor has a security interest in personal property (as opposed to real property), he or she can repossess (or take back) the property if payment isn’t made. One of the most common examples of this course of action is with automobiles. When the vehicle is purchased and the loan made, the buyer is given papers indicating the security interest that the creditor has in the purchased item. Large appliances, furniture, business equipment and expensive electronics are also often sold subject to a creditor’s security interest and right to repossess if payments are not made, although they cannot enter the debtor’s home without a court order.
Of course, the best prevention for repossession is to make the loan payments as agreed. However, if this is not possible, the buyer should contact his or her creditor immediately and explain the situation in advance. Virtually all creditors appreciate being made aware of problems beforehand, and most will be more than willing to work with a borrower that they view as being proactive and responsible.