Both lenders and borrowers are protected by federal law in their dealings with each other. When lenders and creditors have trouble collecting past-due accounts, they can choose to sell the bad debt to a collections company or take legal action themselves to recover the debt. Understanding your options as a lender, and the legal process of debt recovery, can help you to minimize your balance-sheet losses due to customers’ defaults.

Contracts

Protecting yourself against defaults begins when you draft contracts for accountholders. Specify in exact terms the penalties for falling into default in the contract. Set forth exactly how long you will wait until filing a civil complaint, how many times you will contact the debtor after default and the specific court that you will use to file the case. As long as all of this is signed and in writing, the debtor cannot force you to use arbitration, mediation or a court more favorable to them.

Notice of Default

Before taking a defaulted debtor to court, you are required to send the debtor several official notices. Send the notices via certified mail, or speak with the debtors on the phone while recording the conversation—always inform the debtor that you are recording the conversation at the start. Do everything you can to show that you are willing to reach a settlement or create a payment plan to settle the debt outside of court.

As debtors continue to ignore your notices, change the language of the notices to inform them that you intend to file a civil complaint in court, according to the contractual agreement. Excerpt the part of the contract that deals with default in your final notices.

Source: eHow.com

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