BASIC COLLECTION PROCEDURES and TECHNIQUES

1. Billing the customer as soon as their obligations become due.

2. Discuss payment status of the debtors
3. Continuous follow-up through telephone calls and personal visits
4. Sending collection letters
5. Use the friendly collection efforts.
6. Referral to Collection Agencies
7. Referral to Attorneys
8. Mediation
9. Arbitration
10. Small Claims Court/Foreclosure

Qualities of a Good Collection Letter

1. It should be short and direct.

2. It should use dated action.
3. It should not provide any cause to arouse the anger and bitterness of the
customer.
4. It should have a humanistic approach.
5. It should use simple language.

FRIENDLY RECOVERY EFFORTS

When an account becomes a problem, it is definitely unwise to take drastic steps

immediately. It is also unwise to disturb a seller-buyer or lender-borrower relationship
that took years to nurture and develop. The following are examples of friendly collect
efforts.

1. Term Extension
2. Merchandise return or swap
3. Condonation of penalties and surcharges
4. Restructuring (Simple and Document substitution)
5. Deposit the property at the branch office
6. Debtor substitution
7. Dacion en pago
8. Securitization

The above options are practicable only if the debtor or borrower is still willing to pay
and is only unable to do so temporarily. If the creditor is convinced, that the debtor does
not want to pay, no matter what, the above option will not work. If the creditor is aware
that the debtor is on the edge of bankruptcy, or has lost his job permanently, using any
of the above options would only be prolonging the agony; in this case the bank would
prefer to foreclose on the property. Foreclosure is a specific legal process in which
a lender attempts to recover the balance of a loan from a borrower who has stopped
making payments to the lender by forcing the sale of the asset used as the collateral for
the loan.
SOME FRIENDLY COLLECTION EFFORTS

1. TERM EXTENSION

A creditor simply adds a few more days or weeks, even a month, to the due date
of an account. This gives the debtor extra time to recognize his resources and make
good on his obligation.

2. MERCHANDISE RETURN-SWAP

If most of the merchandise remains unsold, the creditor could take back the
merchandise from the debtor. This is advisable if the goods can be sold somewhere
else. A swap arrangement is also a good option; the unsold merchandise is retaken
by the creditor and new merchandises provided to its customer.

3. CONDONATION OF PENALTIES AND SURCHARGES

In this arrangement, the lender is willing to condone, or not to collect, all

penalties and surcharges, and perhaps part of the interest, also, in exchange for the
full payment of the account. Government entities particularly LGU’s, use this
technique for the speedy collection of property and local business taxes.

4. RESTRUCTURING

Simple restructuring include term extension and reduction of the monthly

payments to affordable levels. While document substitution is by changing the
debtors’ account from account receivables to notes receivables. Note receivables
are more reliable than trade receivables. Another advantage of note receivables is
that, if it is negotiable, the creditor can use it as a payment for its own debts or use it
as collateral for a bank loan.

5. DEPOSIT THE PROPERTY AT THE BRANCH OFFICE

In situation where installment payments have remained unpaid for many months,
it would be practical to request the debtor to deposit the items at the branch office,
with the promise that surcharges and penalties will be suspended. If the debtor is
very dependent on the item, he will do everything necessary to reclaim it.

6. DEBTOR SUBSTITUTION

In this technique, the debtor is replaced by another debtor. This will require new
documentation which will extinguish the old obligation and create a new one.

7. DACION EN PAGO

This means that a debtor, who has a property securing the debt, sells the
property to the creditor to settle his debt. One advantage to the debtor is that he is
able to obtain a price for his property that is very close to its market value, this
means that he can get extra cash, too.

8. SECURITIZATION

This applies to unsecured credit obligations. The creditor simply and politely
“requests” the debtor to collateralize his debt.
Referral to Collection Agencies

Collection agencies can be an aid in collecting a past due account. Most collection
agencies work on a contingency fee basis. The creditor company typically pays a
percentage of the amount collected on its behalf by the collection agency. The seller
pays nothing if the collection agency's efforts are unsuccessful.  Collection fees
generally range from 10% of the amount collected to 30% or more. The collection
business is highly competitive; so contingent collection fees are often negotiable.
Generally, creditors pay nothing up front when an account is referred to a third party
collection agency.

Referral to Attorneys
Collection attorneys help in collecting delinquent accounts. Many customers will
respond immediately to a letter or phone call from a collection attorney, even after prior
efforts to collect are unsuccessful. Sometimes, the threat of a lawsuit is enough to
prompt a delinquent and uncooperative debtor to issue payment or to propose a
payment plan. Sometimes, a lawsuit must actually be filed before settlement takes
place. Sometimes a case must go to court before a debtor will issue payment.

Mediation
Mediation is a method of dispute resolution in which parties use an independent
mediator to help them reach an agreement. Unlike arbitration, the mediator makes no
judgment. If the parties reach an agreement, it is not binding. Mediation may be
specified in a contract to any dispute, or the buyer and seller may agree to use a
mediator only after a dispute has arisen.  A mediator must be a neutral third party. A
mediator should have the required training as well as industry experience, since the he
or she may be asked to assess the merits of each party's position. There are
professional associations of mediators that provide training as well as a code of ethics
for mediators. It is advisable to use a professional mediator for their experience as well
as their neutrality.

Arbitration
Arbitration is a method of dispute resolution in which the parties use an independent
arbitrator or arbitrators to act in place of a judge or jury. To be meaningful, the
arbitrator's judgment must be binding on both parties but arbitration agreements can be
either binding or non-binding on the parties. An arbitrator should have the required
training, and should be familiar with industry practices, contracts, and the law.  Creditors
are beginning to appreciate the value of arbitration as an alternative to litigation. The
use of arbitration to settle disputes between a buyer and seller is not automatic. It must
be agreed to in writing. Creditors that want to use binding arbitration as an alternative to
litigation should include a clause in their credit application and agreement stating that all
disputes will be handled through arbitration rather than litigation.
Small Claims Court
Small claims court is a legal venue in which a creditor can sue debtor for non-payment
of a debt. In small claims court, the parties represent themselves, thus keeping legal
fees to a minimum. The process is fairly simple. The creditor files a claim with the small
claims court with proper jurisdiction over the matter. The debtor/defendant receives
notice that the complaint has been filed. A trial date is set. At trial, both parties have the
opportunity to give testimony or to supply evidence to the Court demonstrating that their
position is the correct one.

BENEFITS FROM EFFECTIVE COLLECTION EFFORT

1. Reduction in the volume of accounts receivables

2. Freeing capital of carrying the business operation
3. Increasing profits
4. Reduction of expenses
5. Shortening of credit periods