Dissecting Legal Debt Recovery
Debt recovery is a fundamental process of law that supports the smooth functioning of markets and the economy. The legal debt recovery process is a legal mechanism that enables creditors to recover outstanding debts owed by debtors.
The key principles that underpin legal debt recovery are that debtors should repay what they owe to creditors, creditors have the right to pursue debtors through the courts for outstanding debts, and that debtors should have an opportunity to repay over time in manageable instalments. These principles are based on the underlying philosophy that credit does not exist in society for the benefit of creditors only, it also benefits debtors and society at large. For this reason, strict rules govern how debt recovery should progress in order to balance the rights of creditors and debtors.
Legal debt recovery is a process based primarily on the statutory framework of the law, although it is also based on, and interspersed with, common law of the land and some established precedents on how the courts apply the law and exercise their discretion in adjudicating cases .
Some common legal procedures and processes involved in legal debt recovery include court proceedings, mediation, and negotiations, but primarily court proceedings. While some additional processes such as mediation, for instance, may help in bringing a debt to a satisfying conclusion for the creditor without lengthy court proceedings, they are not to be regarded as an alternative to court proceedings under any circumstances, which is a summary way of resolving disputes that tends to favour the creditor more than the debtor.
The legal debt recovery process is important for creditors, who use this method to safeguard their interests and recover funds owed to them, or it might be used against them to defend claims during legal proceedings. Because the process is strictly based on the provisions of the law, with the courts acting as adjudicator of fairness and justice, a legal debt recovery process is the most favoured mode of debt recovery in most jurisdictions and provides the most assurance to creditors. The alternative to the court-based legal debt recovery process is for a creditor to personally negotiate with the debtor for repayment, which in reality rarely works.
The Step-By-Step Guide to Debt Recovery
Step 1: Initial Contact with The Debtor
The first step is to reach out to the debtor to try and collect the money owed. Often, a friendly reminder is all that’s needed to resolve the matter. Whether in a letter or by phone, giving the debtor the benefit of the doubt is generally seen as a good business behavior and might yield favorable results in the long run.
If the friendly warning fails to resolve the issue, a letter of demand is generally the next step. A letter of demand outlines the amount owed and explains why the debtor is legally obliged to pay. It may also indicate that action will be taken to recover the money if payment is not made by a certain date.
Some debtors do not respond positively to a letter of demand and an alternative to consider in this situation is Alternative Dispute Resolution (ADR). These dispute resolution mechanisms, such as mediation and arbitration, are often less costly and time-consuming than going to court. Generally speaking, these methods involve a third-party arbitrator who acts as an interlocutor between the two parties and attempts to resolve the dispute through negotiation. This method may be appropriate in certain circumstances but usually only where both parties agree.
Step 2: Failure to Respond
If the debtor fails to respond to the letter of demand (or if you don’t deem ADR a suitable option), a statement of claim may be filed with the courts. You will need to provide sufficient documented evidence to support the claim that the debt is indeed owed, so it is advisable to consider engaging a lawyer to assist with the paperwork. The filing fee is currently around $600-$700 for amounts under $10,000. It is also possible to file a claim online through the respective courts, eliminating any need to send faxes back and forth.
As long as the statement of claim is error-free and all relevant facts outlined, the process generally runs smoothly. However, if there are any problems with the claim, such as if a dispute arises over basic facts, or if the claim is incorrectly categorized, the majority of claims are nevertheless able to move forward. Any mistakes detected by the Court will be transferred to an error docket and the applicant will be notified to correct the alleged inaccuracies, subject to some limitations regarding time periods. In the event that the application is found to be brazenly dishonest, the Court will strike out the claim.
Step 3: Going to Court
The next step after the statement of claim is to take the matter to court, as long as the debt remains unpaid by the debtor. Though instances of debtors leaving themselves open for attack are not uncommon, attempting to make a claim in the stress of a small claims matter without legal advice is inadvisable, as you risk making errors that may lead to your claim being dismissed.
However, it is very hard for a debtor to defend against a claim, as even when they fail to respond to the initial claim, they will be served with an entry of default judgment after 28 days. Their only recourse is to argue against the claim itself, which opens the door for the applicant to recover the money owed.
Note that the process is markedly different for small claims and matters involving companies and organizations – given the costs involved, this process should generally only be attempted with the assistance of a lawyer.
The Legislation Behind Debt Recovery Matters
Before initiating debt recovery proceedings, it is vital for businesses to have an understanding of the legal structures and regulations that oversee this process. The legal framework governing debt recovery efforts should be in line with the broader corpus of debt recovery laws and regulations in place at both local and national levels, including the jurisdiction from which the creditor seeks to recover his/her debt. At a national level, debt recovery may be regulated by the prevailing civil code, where the laws codify both the liability as well as the rights of creditors and debtors. For instance, the prevailing insolvency laws in a state could determine the extent to which debt recovery can be made against debtors. Further, regulations regarding security interests and collateral arrangements could also limit debt recovery options. Beyond this, the specifics of debt recovery may be regulated at the local or regional level. Through this, states or regions have the discretion to make arrangements for the manner and process for debt recovery, or at the very least, there are statutory guidelines for debt recovery in such areas. In this context, the local courts may have exclusive jurisdiction for handling debt recovery proceedings. In other situations, they may have concurrent jurisdiction with higher courts (including the High Courts in the event of appeal). This then determines the range of treating debt recovery cases that the creditor can proceed in court. This legal framework governing debt recovery would also determine the procedures for securing a lien over any secured property. There may be some restrictions on what, and how, a creditor can place a lien over property to secure a debt. There may be limits placed on the category or type of property that can be used to secure against a debt. Such legal framework may also regulate the priority of a creditor’s claims such as stipulating whether a creditor’s claims (as ranking first against the property) rank higher than that of other creditors who would also be seeking a claim against the property or those who are also seeking to foreclose on the property. Finally, it may also regulate the extent to which debt recovery actions are enforceable against the debtor. For instance, some legal frameworks may provide for a moratorium against debt recovery for specified periods like in the case of a natural disaster while others provide for exemptions that would prevent debt recovery from being enforceable against specified classes of people such as professionals (like doctors).
Employing Legal Debt Recovery Services
Professional debt recovery services provide an extra layer of support by managing collections. Contemporary credit collections usually involves working with an external company called a collection agency or Credit Control Agency (CCA), to seek out and recover a debt which is unpaid. A CCA will be a team of trained agents, normally operating in-house at their location, who will have a set of rules and guidelines within which they will operate that are linked to the law. These rules and guidelines can dictate what information and contact details can be processed on a systems, and any limits to the methods of contact that can be used.
A CCA can employ several techniques, from simple reminder letters through to legal action such as petitions for bankruptcy or County Court Actions. They will not go to excess where the value of the debts does not justify the cost, they will not pursue debts that have no chance of being recovered without significant cost to themselves or their client, and they will not pursue debtors who are unable to sensibly repay.
Bound by strict rules and codes of conduct, CCAs will often act as a buffer between you and the need to keep chasing your debtors. Most CCAs will charge a percentage of the amount they recover after which they will pass the funds to the client. In addition to employing agents to work through the debt recovery process, many larger CCAs will also have automated debt collection systems that they will refer debtors to, online.
CCAs can, for the right price, employ more effective methods than credit controllers lending themselves to the vagaries of human communication.
So, when do you consider starting the process for the recovery of debt, and progress through the various stages? The answer, apart from cases where specific contractual arrangements, negotiated with commercial counterparties, call for a formal collections process, and this example being relatively rare, is never.
Successful collection of any debt, particularly corporate debts, proceeds in accordance with a number of stages which need to be adhered to before you can expect to recover your funds. The first stage, without question, is where a reminder letter is sent advising of the debtor’s failure to pay and requesting payment. Please, note, however, that an invoice does not constitute a payment reminder. This letter will be drafted professionally and clearly and is a perfect example of why the cost of a specialist lawyer can save you a lot of wasted time and effort in the long term.
Credit controllers should be able to successfully collect all debts using text reminders, personal phone calls, and letters. If the majority of your customer debts are less than £1,000, most cases will be concluded using these means. However, if a customer still fails to pay, persisting with reminders and other non-doorstep collection action may only annoy your customers and lower their future response rates.
Default reminders are sound commercial practice and should always be sent, however the next step requires someone with commercial experience to consider the cost of recovery against the value of the debt.
When employing a CCA, or ultimately a solicitor with specialist debt recovery experience, the costs become more fixed, and you need to balance this against the slow speed with which payment may be received: Payment may eventually come after a year, but perhaps interest can be charged between now and then. If the sum payable is a relatively large amount, you may well decide to take more worry-free automated action, with no more than rare personal contact, whilst if the debt is small, you may decide to leave it due to the high cost of collection.
The existence of a clear procedure for the collection of debts is the best starting point to ensure that recovery proceeds smoothly, particularly where the debt goes beyond the limits of your agreement with your customer. The stages should be clear and each one completed before you move to the next. Then, if necessary call in the professionals with little loss of time, effort, or money.
The Rights and Responsibilities of Creditors and Debtors
The creditor has the right at any time to initiate debt recovery proceedings if the debtor remains in default of its payment obligation. On receipt of the demand from a creditor, the debtor is obligated to pay the outstanding debt immediately or alternatively, if the demand was a letter of demand, to pay the amount within 7 days of receipt of the letter of demand (generally, it also depends on the debtor’s stated rights in terms of the contract).
Should the debtor require any further documents from the creditor, it must request such documents from the creditor. A creditor should provide the debtor with all previously requested documents so that the debtor is enabled to pay the outstanding debt.
A creditor cannot withhold any such documents and similarly , cannot demand subsequent payments in lieu of any documents. When it comes time for the creditor to issue the summons to the debtor, this will be accompanied by copies of any relevant documents which the creditor will seek to rely upon, provided such documents were previously requested by the debtor, as well as a complete set of pleadings issued by the creditor. The creditor may also warrant a copy of any document relied on at a pre-trial meeting.
Should the debtor wish to settle a matter prior to the court proceedings against him, the creditor will be obliged to accept such settlement. In this instance, should the parties comprise of a legal subject and a natural person, the creditor may have to approve the settlement with the benefit of obtaining independent legal advice that the settlement is in the best interests of the debtor.
Common Obstacles to Legal Debt Recovery
The debt recovery process isn’t without its challenges. Whether it’s locating the debtor, collection of payment or through to possible dispute in court, each step can pose a different and difficult challenge to overcome. In this chapter, we explore some of these challenges. Amongst the common issues faced in the debt recovery process are:
Challenge #1: Contacting the Debtor
The first challenge we usually see, is when the debtor has no fixed address. Without an address, courts are often unable to locate the debtor (for the purpose of serving them the claim). In such situation, solicitors can often assist with tracing the person of interest.
Challenge #2: Non-Response
If the debtor chooses to ignore your attempts to contact them, your solicitor may send them a letter before action (a formal warning). This document highlights the efforts of the creditor to find the debtor, and their concerns moving forward. Then threat of proceeding with a court claim is usually enough to get a response.
Challenge #3: Relief from Court
Once you have obtained a judgment against the debtor, it is your responsibility to enforce the court order. However, should they fail to comply, you may need to apply to the court for relief from that court order. Usually, you will need to prove that the debtor has means to pay, but a solicitor can help you navigate this process.
The Role of Alternative Dispute Resolution in Debt Recovery
While the traditional court process seeks to eliminate the uncertainty of having a judge impose an outcome based on the facts and law, Alternative Dispute Resolution (ADR) serves to temper that with a more cooperative process that can offer a fast and often less costly way of reaching a mutually acceptable solution. There are several forms of alternative dispute resolution but two of the most commonly used methods are mediation and arbitration.
Mediation: Instead of placing the parties in an adversarial position, mediation allows parties to work toward a negotiated meeting of the minds to come to a mutually beneficial agreement. The use of a neutral third-party , who has no stake in the outcome, can help parties solve seemingly insurmountable legal disputes. Often, mediation is required by the Court before any action can go to trial.
Arbitration: Arbitration is another alternative to traditional litigation where parties submit their disputes to a neutral third-party arbiter who serves an analogous function to a judge. The arbitrator is usually experienced in the type of matter at issue and renders a decision or award based on the information presented. Arbitration often serves to expedite the dispute resolution procedure while maintaining a private forum.