Poor financial practices are among the leading reasons approximately 82% of businesses fail within the first five years. A company may have adequate capital, good sales volumes, and profit margins, but if most of its sales are on credit, it can be set up to fail.
If your business is dealing with cash flow problems due to credit buyers, you don’t have to wait until it is too late. You can initiate a formal debt clearance process through debt collection letters, which we will look at in this article. Conversely, if your business is on the receiving end of this letter, we also discuss the nitty-gritty of the debt collection letter.
The Basics of a Debt Collection Letter
Also known as a demand letter, a collection letter is an official notification drafted by a lender or debt collections agency and sent to a debtor to remind them of their delinquent payments. Debt collection letters can be issued to both commercial and consumer debtors.
The Purpose of a Debt Collection Letter
A debt collection letter is sent to:
- Inform debtors of an outstanding debt: The primary purpose of the debt collection letter is to inform a debtor their payment is due formally. It highlights when the payment was due and urges the debtor to clear the debt before legal action is taken.
- Initiate payment negotiations: A demand letter is also sent as a friendly way to direct the debtor on how they can initiate a formal negotiation process. It tells them how they can work with the creditor to craft a new payment plan that’ll be rational to both parties.
- Initiate the legal process: No legal action or harsh debt recovery techniques can be utilized before a debtor receives the collection letter. That said, a demand letter is sent to serve as proof that the defaulter was indeed contacted, offered a notice, and informed of the necessary payment clearance procedures they should take before any other legal step was taken.
Types of Debt Collection Letters
If you have tried contacting a defaulting client without success, you are legally obliged to issue the following notices as part of the debt collection letter:
The Reminder Letter
This is the first letter a creditor or collector issues a defaulter. It’s based on the assumption that the debtor forgot to make their payment, or is facing a medical or financial difficulty, hence their late payment. In light of that, a reminder debt collection letter is often sympathetic and offers friendly solutions to help the debtor bring their pay up to date. Usually, the reminder letter is sent 14 days after the invoice’s due date, but you can take longer depending on your relationship with the client.
Even if a client is late on their payment, your goal as a business owner should always be upholding good clientele relationships while facilitating profitability by maintaining efficient cash flow. Therefore, if the client doesn’t respond to the first letter, do not issue threats yet. Before penning an unforgiving letter, send the inquiry letter to ask if they received your first letter, prove your sensitivity to their problems, and your willingness to craft an efficient payment plan for both parties. For instance, you could demonstrate sensitivity by asking whether they are going through a tough situation and show your willingness to help them out by offering them the option to make partial payments.
If even after the inquiry letter, the client doesn’t respond, you have the green light to show your aggressive approach by issuing the appeal letter. You should explain the urgency of the situation and ensure you maintain fairness while showing your aggressiveness. To achieve this, indicate you tried taking an open communication approach through the first two letters, phone calls, texts, and other means you may have used to reach out to the debtor.
Debt Warning Letter
This is the final collection letter before legal action. Most creditors usually send the debt warning letter because the debtor has already proved unwilling or unable to pay. Also known as the ultimatum collection letter, this letter notifies the debtor of the action the creditor plans on taking. It should use an assertive but professional tone.
How to Write a Debt Collection Letter
A debt collection letter is a great way to collect on due accounts without ruining your relationship with your clients. However, it’s still a legal letter, and one wrong move can land you in trouble. That is why we compiled tips on how to write a debt collection letter below:
Understand the Legal Regulations
All types of debt collection letters must comply with the Fair Debt Collection Practices Act (FDCPA). The act was created by the Federal Trade Commission (FTC) to protect consumers from harassment by creditors and debt collectors. For instance, some of the guidelines give defaulters the right to dispute the amount owed. The creditor is also supposed to state the amount owed clearly, and they should only send the letter to a destination the debtor deems convenient. Failure to follow such regulations is perceived as a violation of legal business practices and might land you in trouble. Therefore, the first step to writing an effective collection letter is understanding such regulations.
Consult a Professional
The Fair Debt Collection Practices Act is quite broad. Even if you read it all, it would be difficult for you to grasp everything as this isn’t your area of expertise. Besides, there’s more to writing a collection letter than just grasping the act. That said, it would be even wiser to employ the help of a debt recovery professional or an attorney. They’re well versed with the ropes of collection and will help you come up with an efficient demand letter.
Know What to Include
A demand letter should include the name of the creditor, the amount owed, action required, debt reference, deadline, and the consequences. Ensure you include all these details so your letter is not only compliant with the FDCPA, but also practical.
Use a Catchy Title
When you send a debt collection letter, you want to ensure the recipient opens and reads your email. So, use an attention-capturing title. For instance, a title such as “Urgent! Payment Required” will propel them to open the email to see which exact payment is being requested.
Personalize and Keep It Brief
The purpose of a demand letter, as noted earlier, is to remind, initiate the negotiation process, as well as the legal process. To achieve this, go straight to the point. Let the recipient know what the email is about from the word go. At the same time, personalize it so it doesn’t feel like a generic collection template.
Sample Collection Letter by an Attorney
Here is a sample letter requesting payment of the debt to give you an idea of how to incorporate the tips highlighted above:
Re: Invoice Overdue
This letter is to remind you of your overdue balance, which amounts to $150,000. Kindly remit this balance within 14 days to account number XXXX. Alternatively, get in touch with our headquarters at XXXX to let us know when we should expect your payment, or whether to make financial arrangements.
If you’ve already made your payment, kindly accept our thanks and apologies for any inconvenience this letter may have caused you.
What to Do When You Get a Collection Letter
Receiving a demand collection letter is never fun. It can be quite unnerving, especially if you’ve never received one before. If your business recently got a debt collection letter, here are some steps you should take to stay on top of the situation.
Request for a Debt Validation Letter
You have the right to dispute a debt and request proof that you indeed owe the creditor. Before you acknowledge the debt, ensure you confirm its accuracy by requesting for a debt validation letter. As the name implies, this letter validates the collection by highlighting all the details of your debt. It should include the amount, original creditor’s information, timeline of debt repayment, and points of contact.
Remember, the debt validation letter is often sensitive. You must request for validation within 30 days after you receive the collection letter. Also, it must be in writing. This means the FDCPA will not protect you if you request debt validation via calls or texts.
Research and Understand Your Rights
As mentioned earlier, the Fair Debt Collection Practices Act protects consumers like you from harassment. Immediately you receive the collection letter and confirm its legitimacy, do due diligence by researching your rights. Understand the statute of limitation corresponding to your debt to determine if the debtor has the right to request the payment and identify which other acts protect your rights.
Create a Rational Payment Plan
If your creditor has the right to sue or threaten you, it’d be wise to settle instead of waiting for things to escalate. That being said, identify which payment plan works for you. If your financial situation allows, it’d be wiser to pay the outstanding debt in full and skip the stress. But if not, work out a payment plan with the creditor or collector.
Create a Correspondence File
The last thing you want is to end up with more payments than you should because you cannot remember if you made the last one. Create a file where you’ll keep all receipts, notices, and any other documents you send or receive from the creditor or collector. The collection and validation letters should be the first documents in this file.
Can a Debt Collector Send Fake Letters?
This is a concern most debtors have, and one that you shouldn’t worry about much. Why? Well, the Fair Debt Collection Practices Act prohibits creditors and collectors from falsifying any information on debt collection letters.
Debt recovery is quite tricky. On the one hand, you want to uphold excellent clientele relations and your reputation. On the other, you need to maintain consistent cash flow to keep your business up and running. A debt collection letter lets you strike a balance between these two. However, writing it can prove to be a tad difficult, especially if it’s your first time.