Debt Collection
DIY Effective Debt Collection
The following is an abridged version of an article on DIY debt collection which includes the steps you should follow and a letter of demand you can use.
- Don't just send out reminders. Call the debtor personally and ask if there is any problem. If there is no dispute about the amount owing, confirm this by email.
- If there is a problem (e.g. with the goods or services provided), find out more about it in a way which will dissipate any emotion and provide an atmosphere which is conducive to resolving the problem. It may be appropriate to ask what they would like you to do to rectify the problem. Keep a record of what was said and, preferably, confirm it by email.
- If you are making an offer to compromise, you should mark any email "without prejudice".
- If the only problem is that the debtor needs time to pay, you will need to agree on the payment terms, record them in writing and get a signature if possible.
- If the debtor is in financial difficulty, you are sometimes better off putting pressure on to ensure that you are paid ahead of other creditors (although you should refer to the full article - see bottom of page - about "preferences").
- If the debtor is trying to avoid payment and will not negotiate on reasonable terms, it is time to send a letter of demand (a sample letter of demand is in the full article).
- If the letter of demand does not get a result you may wish to commence legal action without using a lawyer. If so, you can get help from the chamber magistrate at your local court. Alternatively, you may want to do most of the work yourself with some support in the background from a firm like Business Lawyers Online.
Beyond DIY debt collection
A law firm or a debt collection agency?
If you are not successful in recovering the debt yourself, you may need to put it into the hands of a professional. You have two choices - a debt collection agency or a lawyer.
I have heard debt collection agencies criticised for only pursuing the 'low hanging fruit' (i.e. the ones where they think debt recovery is going to be fairly easy) and not actively pursuing the harder ones. If you have followed the steps above, your claim probably falls into the harder category so you may be better off going straight to a suitably experienced lawyer.
Debts owed to you by a company
If the debt is undisputed and you have some evidence of this (which is part of the reason for step 1 above) you can issue a Creditors Statutory Demand which can give you a significant advantage.
Creditors Statutory Demand
This is a document which calls on the company to pay the money within 21 days. If the money is not paid within that time, the company is deemed to have committed an act of insolvency which means you can proceed to wind the company up without the need to go to court to get a judgment. This puts a lot of pressure on a company to pay but the document must be correctly drafted. Even lawyers frequently get them wrong so it is not the type of document you should attempt to do yourself.
Should you compromise or proceed with full debt collection?
This depends on common sense factors such as the likelihood of winning a court case, the chances of getting paid if you do win and what the full cost of debt recovery is likely to be. Keep in mind that the cost is not limited to the legal fees (see below).
Escalation of debt recovery court cases
Before commencing legal proceedings it is very important to assess whether there is any possibility of the debtor cross claiming (e.g. to recover damages for defective goods or services which they may allege you provided). This can result in a serious escalation of the stakes and cost. For example:
Debt collection - the real cost of court cases
- A lot of your time will be spent dealing with the court case so there is a lost opportunity cost.
- A lot of negative energy is associated with litigation. The stress can affect your work and personal relationships.
- If you lose you will usually have to pay the other side's legal costs and, if the other side cross claims, you may have to pay damages.
Preventative debt collection
Effective debt recovery starts with proper documentation i.e. you should make sure the transaction is recorded in an effective contract (see Contracts - an essential guide) including a personal guarantee and retention of title clause, if relevant.
But even a guarantee does not 'guarantee' payment. Therefore, be selective about who you do business with. It is simply not worth doing a deal if the other side is not going to honour their side of the bargain.
Full article
The above is a summary of a paper on Effective Debt Collection - what you need to know and do. The full article can be obtained by completing the Contact us page.