Having defined a number of common debt collection and bankruptcy terms, we can now look at how debts are collected.

Debt collection begins with a demand for payment. Indeed, creditors often make several demands before they try other debt collection methods. The demands may be made in writing, over the phone, or, in some cases, in person. The Fair Credit Reporting Act and state and federal Fair Debt Collection Practices Acts regulate these types of contacts. We will come back to these topics in the next article.

If the creditor is not able to collect on the debt, it may consider other methods to collect its debts. If the creditor is secured (i.e., they have collateral for the debt), the creditor may take steps to use the collateral to satisfy the outstanding debt. Collateral is often given by debtors at the time when the debtor incurs the debt, such as when the debtor borrows money from the creditor and the creditor imposes a lien on the car title (the bank may then repo the car by seizing the car). In many cases, the contractual terms or law allows creditors are able to collect on collateral without having to get the courts involved.

Absent sufficient collateral, creditors typically have to obtain a judgment from a court in order to collect their debts. Creditors can then have the judgment enforced. Creditors may obtain writs of execution, turn over orders, and garnishment orders. I will cover these topics in greater detail soon. For now, just understand that these collection tools allow the creditor to collect on property owned by the debtor - even if the property is held by third parties.

State law also provides protection for certain types of property. This varies from state to state. Protected property usually includes homes, a certain amount of personal property, and some amount of income. We will come back to exempt property soon. For now, let’s take a closer look at how creditors use the courts to collect unpaid debts.