A collection letter is an official notice provided to a customer notifying them of a past due payment to a business. It is a notice sent by a creditor seeking payment for an outstanding debt that contains instructions for the debtor. Instructions should include a stipulated 30 days from the date of the initial notice for the debtor to dispute the notice. A collection letter must be sent to the debtor’s home address or any other address pre-authorized by the debtor.
You must follow the correct step-by-step process and use formal language to provide official notice of a debt owed by your customer, notifying them that the debt is past due.
Note That: It is typically required to send four letters before one can hire a collection agency or record a bad debt expense.
Usage of Collection Letter
A collection letter is used to legally notify a debtor to pay up the amount owed and notify the debtor of the date by which they must repay the debt, else the creditor takes legal action. Also, it serves the purpose of being a record of notice as the creditor is required to give four notices before hiring a collection agent or writing the debt off as a bad debt. A collection letter must be sent to the approved residence of the customer or the home address of the customer. The debtor has 30 days within which they can dispute the validity of the collection letter. If, however, the debtor does not dispute the validity of the collection letter in 30 days, the collection letter remains valid.
Collection of debts under the United States law is governed by the 15 U.S. Code § 1692g
Writing a Collection Letter
When writing a collection letter, it is important to note that the letter serves as a reference document for legal proceedings, and as such, it should be well-written, well-formatted, and well-worded. You need to include all the important elements and avoid all the pitfalls.
Things to be included
A collection letter must comply with the Fair Debt Collection Practices by containing the following elements:
- The Debt amount ($)
- The name of the creditor
- A statement informing the debtor of their right to dispute the validity of the debt within 30 days, else the debt will be assumed valid.
In addition to the three primary requirements stated above, the collection letter should contain the following components:
- Include a copy of the invoice(s)- The invoices relevant to the indebted transactions should be included in the collection letter. If, however, there are multiple outstanding invoices, you may use a summarized statement containing details of all the invoices.
- Include a specific deadline- The creditor must include a specific date for the debtor to make all accounts current. The creditor should phrase the sentence as follows (payment should be made no later than June 12th) do not phrase the deadline like this; Payment should be made within seven business days.
- Payment options- The creditor should include acceptable payment options through which the organization accepts payments from customers.
- Contact information- The creditor needs to include the company’s contact information which includes mailing address, email address, and telephone number.
- Use a postage-paid envelope- Using a postage-paid envelope ensures that the debtor can pay promptly by simply dropping a check in the mail. This way, if the debtor is willing, they can pay it back instantly.
- Compliance with Fair Debt Collection Practices- According to the guidelines of the Fair Debt Collection Practices, the collection letter must contain the debt amount as well as the name of the creditor and a statement informing the debtor of their right to dispute the validity of the debt within 30 days of receiving the collection letter, and that forfeiture of this right means that the debt would be assumed valid.
Dos and Don’ts to Consider While Writing
If you need to write a collection letter to recover some debt, here are some recommendations you need to adhere to.
- Always keep it professional.
- Keep the contents of the letter short.
- Operate under the assumption that the debtor will pay.
- Attempt to contact the debtor via phone call before sending the letter.
- Send an email first before sending the letter.
- Always use the company’s letterhead.
Conversely, avoid doing the following:
- Never include harsh words in your letter.
- Never write a collection letter by hand.
- Never harass the debtor.
- Never send text messages to debtors
- Never communicate with debtors via social media links.
Types of Collection Letter
When it comes to collecting a debt from a customer, you are required to send four different collection letters, and each letter has its specifications.
First Collection Letter
George’s Auto Shop
86, Marina way,
Chicago, CH
89686
Date: June 12, 20XX
Re: Fender replacement collection
Dear Joe Floyd,
URGENT: PLEASE RECTIFY THIS MATTER IMMEDIATELY
We have tried unsuccessfully to contact you via telephone and have left messages in your email to no avail. Despite our best efforts, the following amount remains unpaid, and as such, we would appreciate you making this payment as soon as possible.
Invoice number: XXX
Invoice date: XXX
Invoice amount: $XXX
PLEASE REMIT PAYMENT TO 86, Marina Way, Chicago CH 89686
We regret to advise that unless the payment of the above-stated amount is made by July 12, 20XX, this collection will be passed to our lawyer. This could seriously affect your credit rating, and therefore urge you to contact us immediately to make the due payment or arrange an alternative before the above-stated date.
You have the right to dispute this debt by submitting a written notice within thirty days of receiving this letter. If you do not dispute this letter within thirty days, the collection will be considered accepted by the debtor.
Sincerely,
(Signature)
George Gomez
Second Collection Letter
George’s Auto Shop
86, Marina way,
Chicago, CH
89686
Date: June 12, 20XX
Re: Fender replacement collection
Dear Joe Floyd,
URGENT: PLEASE RECTIFY THIS MATTER IMMEDIATELY
Despite our previous reminder, the below-stated amount remains unpaid. As such prompt payment will be appreciated.
Invoice number: XXX
Invoice date: XXX
Invoice amount: $XXX
PLEASE REMIT PAYMENT TO 86, Marina Way, Chicago CH 89686
We are aware that this may be an oversight and would appreciate it f you would make your payment no later than *. Please use the enclosed postage-paid envelope to mail your check.
We also wish to notify you that we accept debit/credit card payments. You can send us a mail at @., and we will send you a payment link. You can also give us a call at *** to make a payment over the phone.
If you are unable to make the full payment, please give us a call on *** to make payment arrangements.
Thank you in advance for your prompt action on the matter.
Sincerely,
(Signature)
George Gomez
Third Collection Letter
George’s Auto Shop
86, Marina way,
Chicago, CH
89686
Date: June 12, 20XX
Re: Fender replacement collection
Dear Joe Floyd,
URGENT: PLEASE RECTIFY THIS MATTER IMMEDIATELY
Despite our previous reminders, the below-stated amount remains unpaid, and as such, we would appreciate it that you make the payment as soon as possible.
Invoice number: XXX
Invoice date: XXX
Invoice amount: $XXX
PLEASE REMIT PAYMENT TO 86, Marina Way, Chicago CH 89686
We realize that this may be an oversight and would appreciate your prompt resolution of the issue by making payment no later than. Please use the enclosed postage-paid envelope to mail your check.
If you are unable to make full payment by be sure to contact us via phone call to make payment arrangements.
Thank you in advance for your prompt response.
Sincerely,
(Signature)
George Gomez
Final Collection Letter
George’s Auto Shop
86, Marina way,
Chicago, CH
89686
Date: June 12, 20XX
Re: Fender replacement collection
Dear Joe Floyd,
URGENT: PLEASE RECTIFY THIS MATTER IMMEDIATELY
Your account is now seriously delinquent. We have made several attempts to contact you via phone and sent several letters, but we have received no response from you. Please contact us today to pay you’re your debt in full.
The outstanding invoice was due on June 3, 2020, and is currently 30 days past due. The details of the unpaid invoice and we took the liberty of enclosing a copy for your convenience:
Invoice number: XXX
Invoice date: XXX
Invoice amount: $XXX
Description of Services or products: A Ford Mustang was brought in with a damaged fender and a replacement was made on said car.
If our office does not receive any communications from you by **, we will be forced to turn your account over to **. To avoid collection, mail a check or contact us on ** to make a payment by phone.
Thank you in advance for your prompt resolution of this matter.
Sincerely,
(signature)
George Gomez
Free Downloads
Here are free collection letter templates that can be personalized as per requirement:
Tips to Avoid Payment Collection Issues
Many businesses experience clients that have trouble making payments. There are a few precautionary measures you can put in place to avoid a situation where issues arise when collecting payments from customers. Here are a few tips to help you:
Review A/R aging report
The accounts receivable report is one of the high-priority financial reports that all businesses should review often. It contains the details of all unpaid customer invoices including the date of the invoice, the amount due, invoice due date, and the number of days past due.
Offer early discount payment terms
Offering customers an incentive to pay their invoices early encourages the customers to pay their invoices promptly. You may place early payment discounts anywhere between 1% and 5%. Require customers to repay their accounts within 10days of the invoice date. A lot of customers would like to save some money by sending in their payments early.
Request deposits upfront
Although this may seem awkward at first, if you ask your customers to put down a deposit before receiving services, you would not be the only one. If for example, a customer orders a producer, they are required to pay for the product n full (including shipping) before they receive the product. Legal and accounting firms also require their clients to pay a retainer before they provide their services.
If any of the following conditions apply to you, you should consider requesting a deposit:
- Brand-new client
- The high value of projects. (the amount depends on the type of business)
- Projects that stretch beyond 30days.
Be proactive
Following up on payment on time is a common useful practice that many businesses overlook. Many business owners find it difficult to ask for a payment, so they put it off for too long. However, this is not a good practice as early notification helps you to remind the client to make the payment before it becomes past due.
Run a business credit check
You may decide to run a credit check to analyze your client’s business credit profile. You may also view their payment history with trade partners. If you have access to how well your client met their payment obligations in the past, you can easily decipher whether you will get paid on time.
Hire a collection agency
After the creditor has carried out multiple attempts to collect on a delinquent account to no avail, the creditor should consider hiring a collection agency. It is important to note that the creditor will not receive the full amount owed upon hiring a collection agency. Typically, collection agencies charge between 25 to 45 percent of the total amount to be recovered. Hiring a collection agency may not be worth the expenses, depending on the total amount owed.
Writing account off as bad debt
The creditor, after multiple attempts to collect on a delinquent account (via telephone calls, and letters), may decide to cut their losses and elect not to hire a collection agency. If the total amount owed minus the collection agency’s charge is not worth it, the creditor should write the account off as a bad debt. By doing this, the creditor can at least, claim a tax deduction for the amount owed.
Frequently Asked Questions (FAQs)
Many entrepreneurs find themselves asking this question. The short answer is that; it depends. Typically, if the customer makes the payment before you have to involve an outside collection agency, you may consider doing business with them in the future. However, you should include the condition that you will require an upfront deposit. I9f the customer s not willing to pay a deposit upfront, it is best to cut ties with them. If the customer only paid the debt after an external collection agency was involved, you should seriously consider closing their account.
Like any other business decision, you need to scrutinize the collection agency. You should verify the agency’s legitimacy, confirm if they use skip tracing, ensure that they have insurance, and compare fees with their competitors.
The best practices include using invoicing software and communicating with customers before their account becomes past due.
Key Takeaways
Writing a collection letter is a delicate process that requires a lot of consideration and for the business owner to follow guidelines. In addition to serving as a business communication with clients with which you may continue to do business upon repayment, the collection letters may also be used as legal documents should the need arise. As a result, collection letters should be well written and contain all necessary elements and relevant details. If done properly, the collection process will be a smooth and hassle-free process without having to close the account of a client.
