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An introduction to the stages of debt collection

Although the stages of collecting debt vary by business and industry, most organizations have the same objectives — retain the customer and collect the full amount. However, interactions with past-due clients often turn negative, doing irreparable harm to your relationship. In the end, an inefficient, or worse — inhumane process— impacts your bottom line and reputation.


Your company’s standing hinges on the customer experience, and your collection strategy should reflect the entire repayment journey. A customer-centric approach reduces overdue accounts while increasing collection rates. It also keeps a higher percentage of collection activities in-house. But the most significant benefit relates to client retention. Taking early action helps your business build deeper, stronger customer relationships.

In short, shifting from a reactive plan to a proactive model allows you to better serve your customers throughout their journey. This guide will explore common debt recovery processes and how outdated methods differ from the latest digital collections techniques. In addition, we provide actionable steps to reimagine your management and collections system to benefit your company and customers.

What are three stages of the debt collection process?

The stages of collection refer to time-based milestones and related activities that happen after a missed payment. Companies define these phases differently, based on their payment cycle. They will identify overdue payers and group them into repayments that are 1 to 30 days, 30 to 60 days, and 60 to 90 days past due.

Let's take a look at the following three steps in the debt collection process:

Stage 1 - Early stage collections (less than 30 days past due)

During this step, your business may engage customers with repayment reminders through existing touchpoints, such as letters, phone calls, or more modern methods like email or texting. Customers may not be aware they’re overdue or simply need a small repayment extension.

Stage 2 - Mid-stage collections (30-90 days past due)

After the initial phase, you will likely increase efforts to make contact with your past due client. You can segment customers into low, medium, and high-risk categories to determine the appropriate actions. In this stage you may want to consider a payment plan or arrangement if your customer is going through financial trouble. Collecting on some debt is better than none. 

Stage 3 - Late stage collections (over 90 days past due)

After the initial phase, you will likely increase efforts to make contact with your past due client. You can segment customers into low, medium, and high-risk categories to determine the appropriate actions. In this stage 

At the same time, your company moves through the collection stages; your customers continue their post-purchase customer journey. There's an opportunity to strengthen customer loyalty while securing repayment. Many customers or members that become past due for the first-time may be experiencing financially hardship and need additional support. Having a collection strategy that supports these customers is important for retention. 

Instead of strictly looking at your collection stages through a financial lens, consider how your approach and activities fit your overarching strategic objections, such as customer retention. While it's essential to keep an eye on critical timeframes, you don't have to rely on outdated, expensive methods that pit your company against your customer. Instead, humanize your efforts and encourage clients to view your brand as a partner during early-stage collections—a partner offering practical solutions, not unreasonable demands.


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The stages for collecting repayment and dept

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Why do the stages of collection and debt collection matter?

As the cost of acquiring new clients increases, many businesses prioritize customer retention. However, your definition of debt collection stages and related activities impacts churn rates. This is especially true with early-stage collections. The first 30-days of the collection process can set the tone, identifying your company as an adversary or a partner. 

In our recent Lexop survey 30% respondents said they were late on payments because they forgot to pay. This suggests that nearly a quarter of people can pay and are willing to do so, unless there has been a disconnect in their journey. Small changes to your customer engagement methods and timing can go a long way toward preventing past-due bills in the first place. 

Increasing the number of calls you make about an overdue bill may improve the chance that you'll speak to your customer and not a voicemail box. Still, it won't necessarily get your company paid any quicker. And aggressive tactics or non-empathetic conversations may result in more than a lost customer and unpaid bill. It could cost your reputation. 

In 2021, the CFPB received approximately 121,700 debt collection complaints. Among these complaints, credit card debt was the most complained about debt type. 4,000 of these complaints were related to communication tactics. 

Additionally, in light of the many challenges consumers face, customers becoming past due for the first time may take their case to the jury of public opinion after the perception of a poor experience. Although few people want to admit being behind on their bills, it can quickly become a public relations nightmare if they feel your company is wrong or out of line. 

The costs of reputational damage extend to several aspects of your company. Your teams are working in overdrive to deflect and counter negative social media mentions and reviews. They're also assessing and adjusting scheduled marketing activities to ensure they don't amplify an already tricky situation. Reputation issues also impact your hiring efforts, making it harder and more expensive to attract and retain top talent in your industry. 

From taking steps at each stage to addressing complaints, these efforts take a toll on your operations. It's time-consuming and resource-intensive to contact customers about overdue bills repeatedly, and there comes the point where the resources spent on collection efforts outweigh the repayment. At the same time, the alternatives, like charge-offs and third-party collection services, aren't an attractive option anymore. These methods often sever the customer relationship completely and affect revenue. 

A customer-oriented collection strategy can reduce operational costs, improve lifetime customer loyalty, and decrease charge-offs. It helps companies collect more and higher payments. Instead of a strictly reactive process, you can use data analytics and a full-channel strategy to manage each debt collection stage proactively. Your company can drive late payers to less expensive digital self-service tools and optimize the cost per dollar collected.

The evolution of the debt recovery process

As long as people have paid bills, there have been those who fall behind on a payment or fail to pay. And companies use the communication methods available at the time to collect overdue amounts while following regulations. However, securing repayments has traditionally been limited to activities like sending mail and contacting customers over the phone. 

Unfortunately, these methods haven't kept up with the technological advances in consumer lives, from the shift to mobile phones as primary lines to advanced call screening and blocking applications. Over the years, there's also been a significant change away from the more aggressive tactics to an empathetic approach that more closely supports the way people interact with individual brands.

Reactive: A conventional two-stage approach

Historically, collections have been a reactive response to a late payment. During early-stage collections (within the first 90 days), companies used tactics like phone and mail. The communications started friendly but escalated to more aggressive techniques as the 90-day mark neared. Although this approach makes sense on paper, it fractured relationships with customers. Once a client receives threatening communication or perceives the situation as hopeless, it's challenging to continue on friendly grounds. 

The second stage of debt collection (after 60 days) often results in the loss of the customer and the eventual handing off to a collection agency. The agency purchases debt for a fraction of the actual balance and then uses the same outdated tactics to communicate with consumers. In both phases, the consumer solutions for past-due bill repayment were limited and gave people minimal control over the process. 

Traditional methods force consumers to contact the company over the phone and haggle with a less-than-empathetic agent. Much of the timeline was automated, giving little thought to the individual risk factors. Moreover, the collection techniques lacked personalization, so agents followed the same steps without regard for the customer’s communication preferences or truly understanding the value of the client. The reactive methods led to a repayment journey that simply wasn't customer-friendly or convenient.

Proactive: Customer-centric early stage collection

Today's approach to collections goes beyond the call and collect process. Instead of reacting to past-due incidents, companies can actively prevent them, mitigating the need for debt collection while improving client retention. This approach takes advantage of multiple channels, including self-service options. It personalizes efforts to support business objectives and prioritize customer experiences. 

New models offer flexibility that benefits consumers and companies rather than the rigid approach taken in the past. These strategies help your organization frame your collection efforts as a joint partnership, a goal that both parties are working towards reaching in agreeable ways. They're also frictionless, empowering customers to self-cure at their own pace while increasing operational efficiencies. 

Providing convenient methods goes a long way toward improving experiences and increasing repayments. For example, self-service portals, digital payments, and flexible arrangements align with customer preferences. According to our survey, 73% said a digital payment experience would make it easier for them to pay their late bills. 

The latest digital collection toolkits include online payments, 24/7 self-service portals, and communication that’s based on customer preferences, whether that's mobile phones, short message service (SMS) texting, or email. In addition, innovative technology applications deliver more than financial insights. Companies can gain visibility into the likelihood of customers becoming past due and proactively reach out to prevent it from happening.

Then & Now: Experience as the differentiator

Unfortunately, the industry hasn't kept up with changes in customers' lives and communication preferences. According to the CFPB, 85% of consumers reported phone calls as the most common contact method from creditors and debt collectors, and letters via mail came in second at 71%. Additionally, 57% received a message on their answering machine or voicemail. 

A Lexop survey shows there is a decrease in the amount of phone calls made and letters sent for late bill notifications. In 2022, 46% said they were being called, and 27% were receiving letters, where in 2023, the phone calls went down to 26% and letters down to 20%. 

Although some third-party agencies have expanded their strategies and offer an online portal for rectifying past-due accounts, this late-stage approach is less effective than adopting digital collection methods within the first 30 days. Since nearly a quarter of people simply forgot that repayment was due, companies have immense opportunities to engage this segment and offer self-cure alternatives.

The CFPB reported that 51% of communication related complaints were because of repeated calls, or calling outside of the FDCPA's assumed convenient calling hours.

These findings suggest that collections professionals are crucial to improving the repayment experience for customers to retain and delight them while improving efficiency. Not only are these tactics outdated, they don’t produce the desired results. Collections professionals are uniquely positioned to intervene earlier on with tactics that align to customers’ preferences and needs.

Optimizing your past-due customer journey can help your organization improve early-stage collection outcomes. In addition, a humane approach that's personalized to your customer base can amplify your brand in a good way and reduce the reputational risks that adversarial methods bring.

How to rethink your stages of collection

With costs rising across the board, many department leaders are under pressure to account for expenditures and identify ways to cut costs. At the same time, the customer experience isn't under the sole management of your customer service and sales teams. Instead, leaders throughout your company focus on CX objectives, like giving people control over their experience and creating frictionless interactions, regardless of whether that's making a payment or updating an address.

A customer-centric collection strategy allows your organization to reduce operational expenses while achieving high-level customer experience goals. However, it must also identify how you will obtain the quickest return on investment (ROI). With all of the potential advantages of early-stage debt collection improvements, can your business afford to continue with an outdated approach? Follow these steps to review your process and reimagine the stages of collecting a debt.

Review KPIs related to collections at your company

It's important to approach potential improvements purposefully. Do this by assessing your current situation. Collection-related KPIs use current and historical data to identify trends or overlapping results, such as decreasing customer retention and higher sales days (DSO).

KPIs are more than a snapshot of where you're at on goals because, at a granular level, every metric is backed by collection and CX activities with KPIs at the individual and team levels. Team-specific metrics break down the time and resources spent per dollar collected, and the number of activities completed relating to customer retention. 

Reviewing KPIs can identify problems or gaps in your repayment journey, and it can also highlight opportunities. This is especially true when you shift the focus from procedural efforts to using early-stage collections as a customer retention tool. Operational and customer journey data helps leaders identify ways to engage customers, develop meaningful relationships, and differentiate their customer experience from competitors.

Key performance indicators (KPIs) vary by company and industry, but there are four collections-related KPIs that provide insights for all business leaders:

OPEX for collections
Operating expenses (OPEX) that are related to past-due bill recovery fall under your selling overhead. It includes the total costs of collection efforts, such as out-of-pocket expenses, transaction costs, third-party assistance, and administration.

Days sales outstanding (DSO)
This KPI shows the average number of days that it takes your customers to pay after a sale or receiving an invoice. It uses data from your accounts receivable (A/R) and total credit sales reports. Lower rates mean your company collects payments quicker, whereas higher rates reflect ineffective efforts.

Customer retention
Your customer retention rate compares the number of new clients to those that churned. In your collections department, you can drill down this KPI further by looking at how your retention rate differs among people with past-due accounts in various collection stages.

Percentage of revenue lost to agencies
This metric shows how much of your budget goes to paying third parties, such as agencies or attorneys, compared to your company's revenue. Higher percentages signify opportunities for in-house improvements.

Average days delinquent (ADD)
This KPI looks at the average number of days a repayment is made after the due date for a specific timeframe. To get the average days delinquent, subtract your best DSO from your average DSO. Lower numbers indicate that your customers pay on time.


Of course, you should also be aware of customer satisfaction (CSAT) and net promoter scores (NPS). Monitoring sentiment among your clientele can help identify problems with the customer journey that relate to the probability of past due accounts.

Companies further along in their digital journey may track KPIs related to digital outreach and repayment methods. These metrics include email or SMS delivery, bounce back rates, and email open and click-through rates (CTR). By measuring these statistics, companies better understand how different subject lines and call-to-actions affect engagement and repayment rates.

With the right collections software, you can track payment attempts and declines, identifying outreach opportunities early. Payment KPIs identify methods that reduce the average time to pay, have a higher response or self-cure rates, and increase the total amount collected.

Set objectives for your initiative

Now that you understand the effectiveness of your current recovery efforts, it's time to set goals for improvement. Collection objectives should align with corporate initiatives and tie into desired business outcomes at the upper level. Use plain language, choose a specific timeframe, and set an achievable yet optimistic figure for the best results.

A top-level customer retention goal may be to improve customer retention rates by 3% over the next quarter. Then, each department is tasked with identifying opportunities to increase customer acquisition and reduce customer churn. Your collections team could focus on engagement methods for early-stage past-due customers and use KPIs to determine how your efforts affect retention and churn. 

In addition to customer satisfaction and retention, you can also focus on efficiency. Collections teams can use tools such as self-service online payment portals to allow collection agents to spend time focused on higher-risk accounts.

Your goals for recovering past-due payments may include:

Your goals for recovering past-due payments may include:


Retain customers

Increase the number of clients who continue to interact and purchase from your business after resolving an overdue bill.


Recover more revenue

Boost the amount and number of repayments at the early, mid, and late stages.


Avoid agencies

Decrease reliance on third parties for repayment collection by focusing on proactive, early-stage activities.


Reduce OPEX

Lower the amount of financial and human resources required to collect past-due payments.

Create a map for your collection stages

Although you're likely familiar with a collections flowchart or process map, this method fails to consider the customer experience or identify the role of technology at each phase. Update your map to include this information while documenting the steps to recover past-due accounts. 

By exploring your customer's repayment journey, you can increase efficiency for more accurate and faster collection and ensure an audit trail that accounts for the latest communication platforms. An optimized plan also provides a standardized, scalable process compatible with adding new clients or staff. Moreover, the new map should identify proactive and preventive measures before your client misses a repayment. 

Here are the essential components to add to your map:

  • Dates or milestones for each phase: Include timeframes for each step of your process, including before the payment due date, early-stage collections, and debt collections.  
  • Identify customer mindsets per stage: The first step to effective communication is understanding your customer and how their thoughts and feelings change throughout their journey. 
  • List specific collection tactics for each phase: This is where you dig into the activities taken to engage customers before and after a missed bill repayment. It should include automated actions and those taken by your team.


Plus, don't forget to include technology milestones to assess your ROI when using collections software to communicate, track past-due accounts, and capture data on your collection techniques. Consider monitoring KPIs such as payment portal traffic increases, the total amount collected, and reduction in the average time to pay.

Terms to know

Terms to know

As your company moves away from the call and collect mindset, you'll encounter new terms…. It's important to define each one clearly so that everyone in your department is on the same page. Identify terminology changes and provide your staff with clear definitions.

Here are the top debt collection terms for your updated strategy:

As your company moves away from the call and collect mindset, you'll encounter new terms…. It's important to define each one clearly so that everyone in your department is on the same page. Identify terminology changes and provide your staff with clear definitions.

Here are the top debt collection terms for your updated strategy:


Digital collections

This term refers to the use of online portals, email, and SMS texting to collect overdue payments.


Humane collections

A customer-centric approach is kind, empathetic, and benefits your clients and company. It includes active listening and personalized conversations.


Early-stage collections

Early-stage collections refer to the timeframe when your customers are past-due on payments and require an intervention on behalf of the company to collect. In the updated collections model, savvy companies use techniques like digital portals and empathetic communication to retain and delight customers, reducing or eliminating the need to turn customers over to a collections agency.



This term means past-due customers can access self-service options to make payments or settle their accounts without interacting with an agent.

3 tips for rethinking your stages of collecting debt

As the cost of living increases, consumers may cut back on purchases, forgo certain debt repayments, or search for alternative products and services. According to the Q1 2022 TransUnion Consumer Pulse survey, 30% of respondents said that "they'll be unable to pay at least one of their current bills and loans." As a result, your company may face higher churn rates and increased collection costs. 

Optimizing your recovery journey and specifying practical actions for each stage can help your business overcome these problems. Collection best practices include leveraging digital channels, prioritizing proactivity, taking a humane approach, and switching your messaging and tactics to achieve results. Reimagine your strategy with these tips.

1. Focus on proactivity using digital channels, not reactivity

Consumers don't browse, buy, and communicate how they once did, so approaching them using outdated techniques won't work. Modern customers won't respond to antiquated practices, and despite the promise of popular promotions, one size never fits all. Not when it comes to consumers and not in debt recovery. 

Fortunately, getting to know your client is easier than ever before using one of the most valuable assets you have, consumer data. But, mounds of data can prove useless without proper analytics. Automated, AI-based data analytics offers a contemporary solution to understanding individual consumer needs and what approach works best for which client. 

The digitalization of collections processes helps companies reach and engage past-due customers proactively. Customers often have no idea they are past-due until they receive a call or letter, by which point it is too late—many can repay the debt with a few minutes of their time, they just need to be reminded. Using online payment portals and tactics like email and text message, collections teams can proactively reach customers and resolve past-due accounts faster. In return, the past-due customer benefits from a flexible and digital treatment that empowers them to resolve their account at their convenience.

2. Don't be afraid to experiment with messaging and tactics

After processing your consumer data, it is time to put it to good use. Capitalize on its value by creating a multi-channel outreach system custom-designed for the individual client. The system includes segmenting your audience, creating tailor-made messaging, then sending it out through the appropriate digital communication channel. 

Customer segmentation is a valuable strategy to optimize resources to recover more  for fewer costs. It involves dividing clients into groups based on the type of account, credit score, and payment method. Take it a step further by separating clients according to payment history, income level, and amount of debt. Use as many subcategories as necessary to create a system scaled to your company.

Tailoring the right message to the right customer can significantly impact achieving a favorable result in the debt recovery process. When creating messages, content, tone, and frequency are three areas to consider. The content of the message matters but don't forget about the way you say it and how often. 

New communication channels have created new consumer expectations. Traditional debt collection call centers are impractical, inefficient, and outdated. Often calls go to voicemail, and unopened letters go directly to the recycling bin. Digital communication channels offer clients convenience, which leads to higher engagement. 

Email, SMS, and self-service payment portals and websites — better yet, a combination of all three — are effective channels for recovering assets. Digital channels allow clients to receive, digest, and respond to your message on their terms.

3. Be humane and create a win-win for your company and your customers

When interacting with a company about a past-due bill, 67% of Lexop respondents said the agent wasn't empathetic or understanding. This staggering figure represents a disconnect that can cost your business customers. After all, your debtors are individuals, so they must be treated like such. Tailored messaging, personalized according to an individual's preferences, is a critical modern collection best practice.

You can use their customer profile data to segment clients into categories. These classifications will then inform how you communicate with them going forward. Collections should be a dialogue, not an imposition of terms. This means that particular emphasis needs to be placed on digital communications' content, tone, and style. Your messaging should be customer-centric and natural sounding, not automated or forceful. 

This humane approach comes naturally when speaking face-to-face with someone. Mirroring — imitating the other person's speech, manner, and gestures — is one of the most effective sales tactics. Extend this approach to your digital communications for the best results. 

By communicating with people how they like to be spoken to, you have a far higher chance of creating an effective dialogue. For instance, some customers might want to avoid confrontations and embarrassment, requiring a softer, more nuanced tone. Others may wish to choose options like paying a partial amount, refinancing rates, or renegotiating terms. 

Revamping your collection approach starts with collecting, processing, and automating consumer information, then using that data to design a collection technique custom-built for the individual client. Still, in the end, it comes down to relationships. Don't underestimate the importance of humanity and the personal side of how you interact with your customer.

Resources for humane collections

With 38% of TransUnion respondents saying they handle the majority of their transactions online, there's a good chance your customers would like options for their journey. Moreover, you and your team deserve efficient solutions that produce noticeable results, from minimizing losses to reducing operational costs. 

Explore these resources to improve your approach during the stages of collecting the debt:


Today, only 32% of people use traditional methods (phone, in-person, or check) to pay past-due bills. Yet, consumers are concerned about their financial well-being and want more control over their accounts. Companies that support their customers will have a competitive advantage. Talk with an expert to learn how to level up your customer's repayment journey.