The relationship between debt collection and a healthy economy

by | Sep 24, 2022 | Debt collection, Debt Collection

relasionship between debt collection and a healthy economic

Perhaps no one thinks debt collection has an impact or relevance to the economy. Many people believe that debt collection is only for the purpose of helping the lender collect debts from the borrower. However, the relationship between debt collection and the economy is much closer than that. In this article, TNTP will analyze and point out views to clarify the issue: “The relationship between debt collection and a healthy economy”.

1. Debt collection activities help reduce bad debts

The concept of “debt” began when the market appeared, since then, debt has become something that cannot be eliminated. The existence of debt is necessary for the economy because it shows that the nation’s cash flow and finance are still moving. For example, banks lend capital to enterprises to do business and profit, let people owe to pay for living needs, buy houses, buy cars, etc. In return, borrowers will have to pay interest so that banks can continue lending and developing the bank system. If the debt cannot disappear, then we can only control the debt well and limit bad debts. This is also the most important role of debt collection for the economy.

a) What are bad debts?

Bad debts are debts that the debtor is unable to pay when the time limit committed in the credit contract has come. Normally, debt will be considered a bad debt when it is 90 days past due and the debtor fails to pay the debt.

b) The impact of bad debts on the economy

Bad debt is a factor that causes a “weak” economy because the lender cannot resume the debt. This affects the business of the lender as well as the lender’s ability to pay the debt to another third party. Examples are as follows:

  • A borrows from bank X an amount of VND 500,000,000 for business cooperation with a term of 6 months, interest is 7%/year. However, after a while, Mr. A made a loss so he could not pay the principal and interest on time. Mr. A’s money becomes bad debt.
  • Insurance company B has made a payment guarantee for Mr. A’s debt, under which Insurance company B will be responsible for paying Bank X in case Mr. A is unable to pay the debt on time. After that, Mr. A will have to pay the guaranteed debt to Insurance company B within a certain period. However, when the time for payment of Insurance company B comes, Mr. A is also unable to pay the debt.
  • If only Mr. A cannot pay the debt, Insurance company B can maintain guarantee activities when collecting money from other customers to compensate for Mr. A’s debt. But if too many customers of Insurance B cannot pay guaranteed amounts like Mr. A, Insurance B will default when there is not enough revenue to pay to Bank X.
  • Because Insurance B cannot pay Bank X on time, therefore, Bank X has to tighten lending activities, increase lending interest rates, and cut the benefits of deposit activities for the purpose of keeping capital.
  • Bank X’s adjustment caused a sharp decrease in the number of borrowers, savings, and loan capital, Bank X fell into a difficult situation because the debt amount was not refundable. To keep the bank’s operation from going bankrupt, causing panic among many people, the Government had to issue policies to loosen and restructure lending activities.

As can be seen, debt activity is a circular chain. If there is a broken link, it will affect the whole circle like a domino effect.

c) Debt collection helps limit bad debts, stabilize the economy

To prevent bad debts from losing control, not only the lender itself and the debtor must assess the ability to repay the debt but the competent authorities must also take better management measures. Besides, debt collection activities play an important role to help limit bad debts. Many debts cannot be resolved by the parties, the jurisdictions are also helpless but the debt collection organizations can do it. These organizations and individuals understand the psychology of the parties as well as the characteristics of each debt, so they have appropriate measures to help solve debts. In fact, there are quite a lot of bad debts that have been handled by debt collection activities.

2. Debt collection helps protect the money and property of the entitled party

Normally, if the debt is not paid on time due to the inability to pay debt; the debtor fled from the residence, and the headquarters stopped working, … the party has the right to be “afraid” to initiate a lawsuit for fear of losing time and money without regaining money. At this time, with their major, debt collection organizations will represent the right to request the debtor to pay the debt. In other words, debt collection helps protect the legal rights of the entitled party, ensuring the health of debt collection activities under the laws.

3. Debt collection preserves the relationship of the parties in debt activities

When the debtor intentionally avoids payment, the entitled party is likely to have a negative mentality, which leads to illegal acts. These acts can be mentioned as texting, calling continuously, cursing, insulting the honor and dignity of the debtor, disclosing personal information and images without the consent of the debtor, threatening to use violence or destroy the debtor’s property, etc. These acts not only do not bring good results but also have the opposite effect, causing the entitled party to be administratively sanctioned or even criminally prosecuted.

Although the debtor’s failure to pay on time is wrong, the entitled party should not implement illegal acts to collect the debt. In many cases, the parties did not understand the provisions of the law, so the conflict increased, leading to unfortunate consequences. Meanwhile, debt collection organizations understand the provisions of the law and have experience so they can be intermediaries and help the parties resolve conflicts through negotiation. This approach is both effective and preserves the relationship of the parties, proving the importance of debt collection for the economy and society in general.

4. Conclusion

Through the above analysis, it is clear that there is a relationship between debt collection and a healthy economy. Debt collection helps to control and limit bad debts, protect the legal rights of the entitled party, and preserve the relationship of the parties when there is a conflict. It can be seen that if debt collection activities are managed healthily, society will certainly be ensured and the economy will also develop stably. The above are views on the relationship between debt collection and a healthy economy. Hope this article was useful to you.

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