CC W13

Collection

Credit/Loan Collection

• crucial process that ensures lenders recover funds lent to borrowers while maintaining financial stability

• involves structured communication, strategic follow-ups, and adherence to legal & ethical guidelines

A well-managed loan collection system fosters

• trust between lenders & borrowers

• minimizes defaults

• support a healthy financial ecosystem

Whether dealing with personal loans, business credit, or institutional lending, understanding effective collection practices can lead

to improved repayment rates and stronger relationships

Collection Program

strategies, organization, and procedures for recovery of receivables

Company may consider various collection strategies

1. should it subcontract collections through a collection agency, or should collections be done in-house?

2. as a policy, should it employ “high pressure” collection tactics or the more indirect approaches?

The choice for collections may range

from the use of salesmen to double-up as collectors to a separate decentralized collection unit responsible only for that function

Forces of Collection

1. Salesman

2. House Collectors

3. Attorneys (Legal Counsel)

4. Collection Agencies

5. Government

Stages of Collection

1. Reminder Stage

2. Discussion Stage

3. Urgency Stage

4. Legal Action Stage

This refers to the structured process of recovering debts from borrowers. Each of them is designed to encourage repayment while maintaining ethical and legal compliance.

Collection Stages

Reminder Stage

initial notifications, such as invoices and payment reminders, are sent to borrowers to prompt timely payments

Discussion Stage

if payments are delayed, creditors engage in direct communication to understand the reasons and negotiate repayment terms

Urgency Stage

stronger collection efforts, including formal demand letters and escalation procedures, are implemented for persistent non-payment

Legal Action Stage

if all previous efforts fail, creditors may pursue legal avenues, such as court proceedings or debt recovery agencies

Tools and Aids

1. Automated Payment Reminders

2. Debt Collection Software

3. Skip Tracing Tools

4. Alternative Dispute Resolution (ADR)

5. Factoring Services

6. Legal Documentation

7. Credit Scoring Systems

Why do loan collection relies on various tools and aids?

To streamline the process and improve efficiency

Automated Payment Reminders

digital tools send reminders via SMS, email, or app notifications to encourage timely payments

Debt Collection Software

platforms help track overdue accounts, manage communication, and automate collection workflows

Skip Tracing Tools

used to locate borrowers who have changed addresses or contact details

Legal Documentation

demand letters and formal notices ensure compliance with legal procedures

Credit Scoring Systems

assess borrower risk and prioritize collection efforts

Factoring Services

third-party firms purchase outstanding debts to recover payments on behalf of lenders

Alternative Dispute Resolution (ADR)

mediation and arbitration tools help resolve disputes without litigation

Basic Collection Approaches

1. Education

2. Persuasion

3. Problem Solving Assistance

4. Coercion

Education

• at the onset of the creditor-debtor relationship, it is always practical and a good collection management technique to indoctrinate the debtor about the credit and collection policies and procedures of the creditor

• during the relationship, it must be emphasized that prompt, up-to-date payment of the account is expected and is mutually beneficial

Persuasion

• plays a crucial role in debt collection, helping creditors encourage borrowers to fulfill their financial obligations while maintaining positive relationships

• effective persuasion techniques rely on psychological principles and strategic communication

6 Key Approaches of Persuasion

1. Ethos (Credibility & Trust)

2. Pathos (Emotional Appeal)

3. Logos (Logical Reasoning)

4. Reciprocity

5. Commitment & Consistency

6. Social Proof

Ethos

• Credibility & Trust

• Establishing credibility ensures borrowers trust the collector’s authority and fairness in handling repayment discussions

Pathos

• Emotional Appeal

• Using empathy and understanding helps debtors feel heard, making them more likely to cooperate

Logos

• Logical Reasoning

• Presenting clear facts, repayment benefits, and consequences of non-payment encourages rational decision-making

Reciprocity

Offering flexible payment options or small concessions can motivate debtors to reciprocate with timely payments

Commitment & Consistency

Encouraging debtors to make small commitments increases the likelihood of full repayment

Social Proof

Highlighting how others successfully manage their debts can influence borrowers to follow suit

Problem-Solving Assistance

• there are occasions when a debtor wants to pay his debt but cannot do so because of problems

• problems may be directly related with the debtor’s business or due to internal or external reasons affecting his inability to pay

• creditor must always be ready and willing to help the debtor

• success or failure of this aspect of collection problem will have an impact on the long-term relationship with the debtor

• one must be a good creditor not only in good times but in bad times as well

Coercion

• refers to aggressive or forceful tactics used to recover debts from borrowers

• often involves pressure, intimidation, or legal threats to compel repayment

• may lead to short-term success, it can damage borrower relationships, violate ethical standards, & even result in legal consequences

• ethical debt collection practices prioritize negotiation, transparency, and compliance with consumer protection laws to ensure fair treatment of borrowers

• many countries have regulations that prohibit coercive collection methods to protect individuals from harassment or undue pressure

Collection Practices

1. clear communication

2. early follow-ups

3. flexible payment options

4. structured collection process

5. maintain professionalism

6. leverage technology

7. legal considerations

Effective loan collection requires

strategic approach that balances persistence with professionalism

Clear Communication

• ensure borrowers understand their repayment terms upfront

• transparent policies help prevent misunderstandings

Early Follow-Ups

• contact borrowers before their due dates with gentle reminders

• proactive communication reduces late payments.

Flexible Payment Options

offer multiple ways for borrowers to make payments, such as online banking, auto-debit, or installment plans

Structured Collection Process

implement a step-by-step collection strategy, including reminder calls, written notices, and escalation procedures if needed

Maintain Professionalism

• stay polite and respectful, even with difficult cases

• a good relationship with borrowers increases the likelihood of repayment

Leverage Technology

use automated payment reminders and collection management tools to streamline the process

Legal Considerations

be familiar with relevant laws and regulations regarding debt collection to ensure compliance

General Types of Debtors

1. The Up-to-Date

2. The Occasional Delinquent

3. The Habitual Delinquent

4. The Changed Circumstance

5. The Premeditated Delinquent

The Up to Date

a debtor who pays on time and who responds to available prompt payment incentives offered because of his sound financial position

Occasional Delinquent

• someone who misses payments sporadically rather than consistently

• type of debtor may experience temporary financial difficulties, unexpected expenses, or poor budgeting, leading to occasional delays in repayment

• unlike habitual delinquent debtors, they generally intend to pay but struggle with timing or financial management

Handling occasional delinquent debtors requires

a balanced approach that encourages repayment while maintaining a positive relationship

Strategies for an Occasional Delinquent

• Set Clear Payment Terms – ensure borrowers fully understand their repayment obligations, including due dates and penalties for late payments

• Send Timely Reminders – regular follow-ups via email, SMS, or phone calls can prompt debtors to settle their accounts

• Offer Flexible Payment Options – providing installment plans or adjusted schedules can help debtors manage their financial difficulties

• Address Disputes Quickly – resolving billing concerns or misunderstandings promptly prevents prolonged delays

• Engage Professional Debt Collectors – if necessary, third-party collection agencies can assist in recovering overdue payments

Habitual Delinquent

• someone who repeatedly fails to meet their financial obligations despite having the ability to pay

• type of debtor often exhibits a pattern of non-payment, late payments, or avoidance of collection efforts

• in legal terms, habitual delinquency may be considered an aggravating circumstance in certain cases, leading to stricter penalties

Handling habitual delinquent debtors requires

structured and persistent approach to encourage timely payments while minimizing financial risks

Strategies for a Habitual Delinquent

• Set Clear Payment Terms Upfront – ensure borrowers fully understand due dates, penalties, and consequences for non-payment

• Automate Payment Reminders – use digital tools to send reminders via SMS, email, or phone calls to prompt timely payments

• Offer Incentives for Early Payment – discounts or benefits for early payments can motivate debtors to settle their dues promptly

• Implement a Formal Collections Process – establish a step-by-step approach, including follow-ups, demand letters, and escalation procedures

• Monitor Debtor Behavior – track payment patterns and prioritize accounts based on risk levels

• Engage Professional Debt Collectors – if necessary, third-party collection agencies can assist in recovering overdue payment

• Legal Action as a Last Resort – if all efforts fail, pursuing legal avenues may be necessary to recover outstanding debts

The Changed Circumstance

• someone who initially had the ability to repay their debt but, due to unforeseen events, can no longer fulfill their financial obligations

• these changes can be caused by factors such as health issues, economic downturns, legal complications, accidents, or other unexpected life events

Managing changed circumstance debtors requires

compassionate yet structured approach

Strategies for a Changed Circumstance

• Assess the Situation – understand the debtor’s new financial condition and determine whether temporary relief or restructuring is necessary

• Flexible Payment Plans – offer adjusted repayment schedules, lower installments, or temporary deferments to accommodate their situation

• Open Communication – maintain transparent discussions to find mutually beneficial solutions while ensuring commitment to repayment

• Legal and Ethical Considerations – ensure compliance with debt collection laws while avoiding aggressive tactics that could worsen the debtor’s situation

• Alternative Dispute Resolution (ADR) – mediation or arbitration can help resolve disputes without resorting to litigation

• Debt Restructuring Options – consider refinancing, consolidation, or renegotiation to make repayment more manageable

• Monitoring and Follow-Ups – regular check-ins help track progress and provide additional support if needed

The Premeditated Delinquent

• someone who never intended to repay their debt from the beginning

• unlike other types of delinquent debtors who may struggle due to financial difficulties or unforeseen circumstances, this type deliberately takes on credit or loans with no plan to fulfill their obligations

• often use deceptive tactics, avoid communication, and may even exploit loopholes in collection processes

Dealing with premeditated delinquent debtors requires

a firm and strategic approach

Strategies for a Premeditated Circumstance

• Thorough Credit Screening – conduct detailed background checks before extending credit to minimize the risk of lending to fraudulent borrowers

• Strict Payment Terms – set clear repayment conditions, including penalties for non-payment, to discourage intentional delinquency

• Early Intervention – identify warning signs of premeditated delinquency early and take proactive measures

• Legal Action – pursue legal avenues swiftly if the debtor refuses to cooperate

• Debt Collection Agencies – engage professional collection firms to recover outstanding amounts

• Asset Tracking – investigate debtor assets to determine potential recovery options

• Continuous Monitoring – keep track of debtor behavior to prevent future fraudulent borrowing.

Types of Delinquent Debtors

1. The Negligent Debtor

2. The Honest But Confused Debtor

3. The Financially Struggling Debtor

4. The Disputing Debtor

5. The Evasive Debtor

6. The Habitual Late Payer

7. The Defiant Debtor

Delinquent debtors can be categorized based on

their payment behavior and reasons for non-payment

Negligent Debtor

fails to track due dates and does not prioritize debt repayment

Honest but Confused Debtor

misunderstood the terms of the loan or credit agreement

Financially Struggling Debtor

genuinely unable to pay due to financial hardship

Disputing Debtor

challenges the debt due to billing errors or contractual disagreements

Evasive Debtor

avoids communication and attempts to delay or escape repayment

Habitual Late Payer

regularly postpones payments but eventually settles debts

Defiant Debtor

refuses to pay despite having the financial capacity to do so

Negotiation Techniques

1. stay calm and composed

2. listen actively

3. offer flexible payment options

4. use persuasive communication

5. set clear boundaries

6. engage third party mediators

7. leverage data and analytics

Stay Calm and Composed

maintain a professional and respectful tone, even if the borrower is confrontational

Listen Actively

understand the borrower’s concerns and financial situation before proposing solutions

Offer Flexible Payment Options

adjust repayment terms to accommodate financial difficulties while ensuring commitment to repayment

Use Persuasive Communication

highlight the benefits of timely repayment, such as avoiding penalties or improving credit scores

Set Clear Boundaries

establish firm deadlines and consequences for non-payment

Leverage Data and Analytics

use financial insights to assess repayment likelihood and tailor negotiation strategies

Engage Third-Party Mediators

if necessary, involve professional debt collectors or legal advisors

BSP Circular 454 Series of 2004

• unfair collection practices

• banks, subsidiary/affiliate credit card companies, collection agencies, counsels and other agents may resort to all reasonable and legally permissible means to collect amounts due them under the credit card agreement

• provided, that in the exercise of their rights and performance of duties, they must observe good faith and reasonable conduct and refrain from engaging in unscrupulous or untoward acts

8 Violations of Circular 454

1. use or threat of violence or other criminal means to harm the person physically, his/her reputation or property

2. use of profane language, insult, or obscenities to intimidate you or put you to shame

3. disclosing the names of persons who refuse to pay for past due accounts

4. threat to take any action that cannot legally be taken

5. informing family, friends, or colleagues that you are in debt

6. contacting the person during unreasonable hours (before 6am and after 10pm) except when the account is past due for more than 60 days or you agreed to be contacted at anytime

7. use of false representative or deceptive means in order to collect or attempt to collect debt or information about the cardholder

8. communicating or threat to communicate to a person a credit information, which is known to be false

SEC Memorandum Circular 18 s. 2019

Prohibition on Unfair Debt Collection Practices of Financing Companies and Lending Companies

Procedures

• involve the keeping of records

• billing

• conducting follow-up phone calls

• personal client visits

• undertaking legal actions

Objectives of Collection Program

• To reduce the amount of bad debt losses while controlling collection costs

• To reduce the company’s investment in accounts receivable

This refers to the key players involved in ensuring successful loan repayment and debt recovery. And each of them contributes to maintaining financial stability and ensuring that borrowers fulfill their obligations.

Forces of Collection

Salesman

play a role in setting clear expectations for repayment when loans or credit are issued

House Collectors

individuals or teams handle direct collection efforts, often through follow-ups and reminders

Attorneys or Legal Counsels

lawyers ensure that collection practices comply with legal regulations and assist in legal recovery if necessary

Collection Agencies

third-party firms specialize in recovering overdue debts on behalf of lenders

Government

regulatory bodies oversee fair collection practices and enforce consumer protection laws