If you are new to the world of debt collection, you may be confronted with some unfamiliar terms and acronyms. This handy glossary will help you understand important industry terms, and enable you to feel more prepared and informed when engaging debt collection services.
Key Industry Terms
Account onboarding: The process of onboarding a new client, often including the electronic transfer of account information and review of processes and goals.
Accounts receivable: Money owed to a business by its customers.
Accounts receivable management (ARM): A strategic function of any organization; responsible for billing, credit approvals, collections and more. Companies may outsource many of these activities to a third party, such as a collection agency.
Aged receivables: Accounts with past-due balances. A balance that is over 60 to 90 days old could be considered aged, depending on the company’s billing cycle.
Charge-off: When a creditor decides that a debt is unlikely to be collected. This occurs most commonly because the debt is severely delinquent—typically 180 days or older. After the account is charged off, some creditors still pursue payment though a third party, such as a collection agency or attorney.
Collection call: A call made by a creditor or third-party collection professional to a customer who owes money. The goal of such a call is to motivate the customer to pay their debt. It’s important to note that these calls and other collection activities are highly regulated.
Collection letter: Letters to debtors notifying them that their account is in collections, explaining their rights and outlining next steps, such as how to contact the collection agency and pay their balance. Millions are mailed each year, and some letters are required by law. These letters are also known as “dunning letters.”
Collection software: Software that allows collection agencies to store and update debtor contact information, route the correct accounts to their collection specialists, integrate with dialer software to make calls and track the effectiveness of call campaigns. Most solutions are integrated with other services like skip tracing and mailing services.
Consumer Financial Protection Bureau (CFPB): In operation since 2011, this government agency enforces federal consumer financial laws and serves as a consumer advocate. They work to enforce rules about credit cards, home loans, debt collection and more. In the first two years of their operation, they recovered over $430 million for consumers.
Credit reports: Reports on individual consumer credit history, as reported by the three credit bureaus (Equifax, TransUnion and Experian). Reports show your credit history in terms of loans, credit cards and other factors that help creditors assess your risk level as a potential borrower. If you cannot or will not pay a debt, collection agencies can report the situation to the credit bureaus, which will negatively affect your credit report and make it more difficult to obtain credit in the future.
Debt statute of limitations: Legal time limit a party has to collect a debt through the court system. After that time, no creditor or third party can sue the debtor. However, calling or mailing collection letters is still allowed. The statute of limitations varies by state and type of debt, and is typically between three and 10 years.
Fair Credit Reporting Act (FCRA): Passed in 1970 and enforced by the Federal Trade Commission (FTC), this law regulates the collection, dissemination and use of consumer credit information. Information providers, such as creditors and collection agencies, can only supply information to a consumer’s credit report if:
- the information is complete and accurate
- they have procedures in place to investigate consumer disputes
- they inform consumers if negative information will be placed on their credit report
Fair Debt Collection Practices Act (FDCPA): Enacted in 1977, this law protects consumers from abusive, unfair and deceptive practices by third-party debt collectors. The law stipulates when and how a collector may contact a debtor. It has traditionally been enforced by the FTC, but the CFPB now shares some regulatory duties.
Remittance statement: Report provided by a collection agency showing the amount of funds collected and remitted back to the client company.
Skip tracing: Techniques and products used by collectors to locate debtors whose readily-available contact information is not sufficient. Skip tracing services give agencies access to vast databases of consumer contact information from public records, credit reports and other sources.
Telephone Consumer Protection Act (TCPA): Passed in 1991 and regulated by the Federal Communications Commission (FCC), this is the primary law in the U.S. governing telemarketers. The TCPA restricts the use of dialers, prerecorded voice messages, text messaging and fax machines. As such, debt collectors often find themselves restricted in the ways they are allowed to contact debtors.
Wage garnishment: When an employer is required to withhold an employee’s earnings for the payment of a debt in accordance with a court order or other legal procedure (such as federal or state tax collection). If a creditor takes a debtor to court, they are typically seeking a court order for wage garnishment.
This glossary gives you a basic overview of the important terms and acronyms in the accounts receivable management (ARM) industry. If you have additional questions about any of these terms, please feel free to contact us.
Sources: InsideARM, Consumer Financial Protection Bureau, US Department of Labor