As the end of the year approaches, many eagerly anticipate their tax refunds. The average federal tax refund is around $2,000. And, for the average individual, this amount goes a long way towards annual expenses such as vacations, car repairs, and holiday purchases. Tax refunds can also be used to pay debt, but sometimes, past due bills are not a debtor’s priority after the windfall.
If you are a creditor and your debtor gets a federal tax refund, you might wonder if you can enforce your rights as a creditor and claim part or all of the money. Debt collection laws can be complex at times, but one principle is simple and clear: private creditors (basically any creditor other than a state or the federal government) cannot legally claim rights to a federal tax refund. If someone owes back taxes or a federal debt, the law permits the IRS to offset the refund. State, court-ordered child support arrears and other government debt can also claim rights to refund offset. But private debt holders cannot step in between a debtor and their tax refund
However, the tax refund season can increase a debtor’s cash flow and presents more opportunities to successfully collect on a debt. The biggest part of the collections battle is lack of funds. The best scenario involves positive communication to encourage voluntary payment, while also better informing the creditor so appropriate legal tactics can be enforced, such as knowing when a tax refund might hit a debtor’s account and be attachable. While not automatic like a refund offset, tax refund season can be great for debtors and creditors alike.
Communication instead of litigation
In addition to funds availability, collection success requires communication, timing, and an organized and strategic approach. Legal enforcement, while effective as a last resort, is expensive, difficult to effectively manage, and can give rise to protections that can halt the collections process. Always try to communicate before you end up having to litigate. Legal fees and court costs can eat away at a debtor’s cash, and aggressive legal action can lead a debtor to try to live on a cash basis, hiding money and further avoiding debt repayment. Communication and rapport with a debtor are crucial because they can help a creditor avoid a costly collections process, and encourage a debtor to use some or all of a tax refund to reduce their debt.
The trick is to maintain a professional, friendly, positive, and value-focused relationship with a debtor. Once a debtor sees a creditor as an enemy, it’s much more likely that lines of communication will become severed. In some cases, especially with those who may be experiencing more extreme financial hardship, a debtor can devalue the importance of the debt in their mind. Consistent communication helps return the concept of value to debt.
Debtor communication should be:
Here are some tips on how to execute a communication-focused collection process that can take advantage of a debtor’s cash windfall come tax refund time:
Become your debtor’s partner for success
It’s easy for the debtor-creditor relationship to become antagonistic. But, a friendly approach to communication can convey that you are not your debtor’s enemy, rather, you are their partner in helping them through a financial struggle. With a good rapport, you can explain the benefits of paying their debt and better anticipate payment. This friendly approach can even benefit cases where a debtor disputes the amount owed because it will bring that dispute to light rather than let it grow in darkness. And a friendly tone may be the key to learning about an upcoming tax refund and incorporating it into a repayment plan.
Debtor communication should not be based on the premise of tricking someone to pay a bill. Clear communication is ethical. Be truthful about the collection process, not threatening. With an ethical approach to communication, you can better explain the benefits of prompt payment. Communicating ethically does not mean that you delay pursuing your legal rights to collect the debt, just that you play by the rules. For example, don’t threaten to take your debtor’s tax refund, rather, communicate with them about the benefits to both of you if all or part of the refund goes towards the debt.
Express sympathy and better relate to the debtor
People generally don’t want to get behind on their bills. Job loss, illness, and many other factors contribute to getting behind on payments. Open communication with a debtor that understands how life can make payment difficult can help a creditor better anticipate repayment.
Persistence is the key
Your debtor may not have the resources today to pay their debt. They may not have it tomorrow. And their tax refund may or may not be available to satisfy the amounts owed to you, but without an organized, well-managed, and persistent communication plan, you will lose touch with your debtor. When out of contact, your debtor might get their tax refund or other cash windfall and direct money to something other than paying your debt.
If there is a running theme throughout successful debt collection, it is persistence. Often, creditors do not have the time to develop the rapport and goals-focused communication skills needed for successful collections. This is where engaging the services of a professional debt collection can have the most impact. A professional collector knows legal requirements and options but also can be a source of constant contact and relationship-building to ensure mutual success.
Tax refunds may not be directly attachable by a private creditor, but a professional debt collection agency can keep the lines of communication open so the debtor’s mindset can be refocused on payment. Better communication plus the prospect of a tax refund can translate to success for both parties.
Contact us if you need a professional debt collection agency to help you recover your overdue bills.