These debt collection terms are important to know if you are in a collection situation. The following list of definitions provides meanings of some of the basic debt collection terms.

Collection Agency – A firm whose purpose is to collect on delinquent accounts.

Bad Debt – Accounts receivable that will likely remain uncollectible and will be written off. Bad debts appear as an expense on the company’s income statement, thus reducing net income. In general, companies make an estimate of bad debt expenses that might be incurred in the current time period based on past records as part of the process of estimating earnings. Most companies make a bad debt allowance since it is unlikely that all of their debtors will pay them in full.

Debtor - An individual or company that owes debt to another individual or company (the creditor).

Creditor – A person or organization which extends credit to others.

Accounts Receivable – Money which is owed to a company by a customer for products and services provided on credit. This is treated as a current asset on a balance sheet. A specific sale is generally only treated as an account receivable after the customer is sent an invoice.

Days Receivable – A measure of the average time a company’s customers take to pay for purchases, equal to accounts receivable divided by annual sales on credit times 365.

Aging Report or Schedule – A list of accounts receivable broken down by number of days until due or past due.

Lien - A legal claim against an asset which is used to secure a loan or goods sold on credit and which must be paid when the property is sold. Liens can be structured in many different ways. In some cases, the creditor will have a legal claim against an asset, but not actually hold it in possession, while in other cases the creditor will actually hold on to the asset until the debt is paid off. The former is a more common arrangement when the asset is productive, since the creditor would prefer that the asset be used to produce a stream of income to pay off debt rather than just held in possession and not used. A claim can hold against an asset until all the obligations to the creditor are cleared (a general lien), or just until the obligations against that particular assets are cleared (a particular lien).