From omnichannel collection strategies and self-service tools to artificial intelligence-based collections management systems, the debt collections industry has transformed in the last couple of years. However, what hasn’t changed to a great extent is the nitty gritty of the debt collection process. This article takes a detailed look at some of the basics in debt collection process for council tax arrears in the UK, from what entails a debt, parties involved in the debt collection process with the help of two scenarios.
What is debt, debt collection, and a debt collector?
Debt is nothing but the money borrowed by one person (or organization or firm) from another person (or organization or firm) based on certain terms and conditions for instance the rate of interest, duration , etc. The agreement between both the parties indicates the type of debt, for example if a person is taking a gold loan from a financial institute by mortgaging their gold ornaments, then this debt is defined as gold loan that is categorized under secured debt. The recovery process of the past due debts (of any type) from the borrower is called Debt Collection and the agency who helps in this process is called Debt Collector. Usually, debtees are contacted by debt collectors if they have failed to clear their past due debts due for a long time. For example, if someone has failed to clear their credit card debt then the person will be contacted by the agency who works to recover the money on behalf of the respective financial institute.
Types of debt
Most debts can be classified in the following categories:
- Secured Debt is a kind of debt which is given by the lender by accepting any collateral assets equivalent (or enough) to recover the money in case a debtee fails to return the amount. Examples of such collateral assets include gold loans, vehicles etc.
- Unsecured Debt is a kind of debt which does not require any collateral asset to be shown which can be acquired to recover the money. An example of unsecured debt is like personal loan.
- Revolving Debt is a kind of debt which a debtee can take again and again but up to a defined limit and by paying back the previously taken debt. If a debtee has not reached the defined limit, then they can still take further debt but not beyond the limit. Example of such debt is credit card.
- Corporate Debt is the most complex type of debt because this includes a variety of debts like bonds and commercial paper, companies that need to borrow funds to run their businesses, money owed to local government bodies like council, money owed to central government, money owed to any services provider like IGL, British Gas and so on.
- Mortgages are mainly related to real estate which are given to a debtee to buy a house or land. Another example of mortgage debt is that if someone needs money then, they can mortgage their property (house or land) to a financial institute who can issue the debt. Usually, the duration of mortgage debts is longer, like 15 to 20 years.
For this article, I will use corporate debt (with sub type as council tax) as an example, and I will use United Kingdom (UK) processes which are followed by different UK based agencies (debt collectors) to recover the money from the borrower (defaulter) and I will try to explain the processes followed within UK and outside UK to recover the debt. In UK, there are many agencies (debt collectors) who are providing their services to individuals and organizations, including landlords, utility companies, solicitors and agents, local government, central government etc.to recover their money, property, or other assets within UK and outside the UK.
Different types of corporate debts have different life cycles, and, within a particular cycle, methods to recover the money may be different. Many agencies (debt collectors) provide debt collection services only but no enforcement services and for enforcement services they work with some other agency (debt collector) who provides enforcement services. There are many agencies who provide debt collection and enforcement, both types of services. Corporate debts may be of different types and below are just a few examples,
- Council Tax
- Parking Violation
- Traffic Violations
- Residential Tenant Evictions
- Illegal Encampment
- Forfeiture of lease etc.
Now to understand the process, let’s pick council tax as an example.
Council tax is a system of local authorities to collect tax on domestic property. When most of the people must pay council tax but some are exempted like full time students, disabled people etc.
Let’s consider two scenarios which I will use to explain the process followed within the UK, and outside UK. Also assume that the agency (debt collector) with whom council has tied up, is an agency that provides not only debt collection services but domestic and international, both the services. The enforcement agencies in the UK are applicable only within the country. For outside the UK, they must work with an enforcement agency in the respective country or work with some solicitor who can take the matter forward as per the law of that country. These agencies (debt collectors) are mainly working on a commission basis and commission is pre-agreed with respective clients (like individual, business, local government, central government etc.) to recover the money within the UK and outside UK, which could be different based on type of debt and country.
Council tax debt recovery - Scenario 1
A person is staying in the UK and hasn’t paid his council tax for a long time now. Now how will the local authority (council) recover the debt?
First and foremost, the respective council files a case against the defaulter in the respective county court. During the court hearing, if the case gets approved then council has to handover the case to a debt collector to recover the money on behalf of council.OR
If the case is not approved then the case is considered and, in this scenario, court may ask the council to pay some amount to the defaulter as penalty. Below is a simple workflow which is followed by most of the UK based debt collectors to recover the money within the UK.
- Step 1:
As per law, the debt collector will try to recover the money on behalf of the council, by making some phone calls and by sending the letters to the defaulter. If the defaulter agrees to pay the money, then the case will be closed post payment, else the case will be forwarded to next step i.e., Legal. Figure 1 is a simple flow chart of different steps involved in the collection phase where a defaulter might receive multiple phone calls and multiple letters at a predefined frequency and this frequency can be different in different situations.
Figure 1: Debt collection flow-chart
- Step 2:
If the case has been forwarded to legal team, then the legal proceedings begin that basically entails sending a financial quote to the respective client that states the expenses involved in legal process. If the client approves the expenses, then the legal team can start with legal process that begins with sharing the case details with an in-country solicitor, who then initiates the legal process with the respective county court. Based on the judgement of county court, further steps are defined. For example, if county court has given the judgement in the favor of debt collector, then the case will move to the next steps. But if the county court has given the judgement in the favor of the defaulter, then the case will be closed. In this scenario, the county court might impose a penalty on the debt collector which they would need to pay to the defaulter.
Figure 2: Council tax debt recovery legal proceedings in UK
- Step 3
If the defaulter has not paid the money even after legal process, the case details are shared with an in-country enforcement agency, who initiates the enforcement phase. To initiate this phase, first a quote is sent to the client that basically states the expenses involved in this process. If client approves the expenses, then enforcement agency initiates the enforcement activities. In this phase, the enforcement agency will try to recover the money by making some phone calls or by sending the letters. However, if the defaulter fails to pay the money, then an enforcement agent will be assigned to recover the money. This enforcement agent will visit the defaulter’s place physically and they will try to make some offer to the defaulter to pay the money in installments. If the defaulter agrees then enforcement agent will update the system with the agreed payment plan. But if the defaulter doesn’t agree, then enforcement agent confiscate a movable property for instance a vehicle (depending on debt amount) to recover the money as they are legally within their rights to do so. This situation is called Goods Received. Goods are then auctioned, and the money is recovered.
Figure 3: Council tax debt recovery legal process – enforcement within UK
Council tax debt recovery - Scenario 2
A person who was staying in the UK but has repatriated to his native country without paying his council tax. So, now what the local authority (council) will do to recover the debt?
First the respective council must file a case against the defaulter in the respective county court and during the hearing, if the case gets approved then the council must hand over the case to some debt collector to recover the money on behalf of council. Below is a simple workflow which is followed by most of the UK based debt collectors to recover the money in another country (outside the UK).
- Step 1:
This step remains the same as if the money is to be recovered within the UK, where debt collectors try to recover the money by making phone calls and by sending letters to the defaulter. If the defaulter pays the money, then the case is considered closed otherwise, it goes to step 2.
- Step 2:
This step is little different than step-2 of within UK process. In this case, debt collector hires a solicitor in the country of the defaulter and shares the debt details with them. The solicitor then tries to recover the money by making phone calls (no letters). If defaulter clears the debt, then case is closed otherwise solicitor starts legal process with the court but before they start the court process, they need to share the financial quote with the debt collector who then shares the quote with the client which explains the expenses involved in this process and if the client approves the quote, then solicitor starts the process. Court issues a legal notice to the defaulter, if paid then case will be closed otherwise solicitor informs the debt collector with the output and debt collector reaches out to the client, if they wish to initiate enforcement phase. For enforcement phase, first debt collector sends a financial quote to the client, if client approves the court, then debt collector will initiate the enforcement phase otherwise case will be considered as closed.
Figure 4: Council tax debt recovery legal proceedings outside UK
- Step 3:
To initiate the enforcement activities, UK based debt collectors must go via solicitor, who helps in initiating the enforcement activities with a pre-identified enforcement agency of that country. This is to make sure that UK based debt collectors does not breach any law of the country the defaulter is based out of. High level process is depicted in Figure 5.
Figure 5: Council tax debt recovery legal proceedings – enforcement outside UK
There are several layers and nuances to the debt collection process and this article covers only the lifecycle of a debt for council tax arrears from the point of view of debt collection process. Our experts at Nagarro possess in-depth domain knowledge in various types of debt collection processes<link debt collection processes till expertise to a relevant Nagarro service page> and leverage this expertise in domain/business consultancy, software development & maintenance to manage the lifecycle of different types of debts. Keep watching this space for more upcoming articles that will cover topics like corporate debt and so on.