Debt Collection: How Do You Decide When to Issue Legal Proceedings?
It is important to take debt collection action quickly. The more time you waste on repeating the process of chasing letters, emails and calls the less chance you stand of recovering payment and just as importantly this is time you could be spending running and growing your business.
If your debtors have been unable or unwilling to pay you, chances are they may also owe money to others, who will also be trying recovery action, so it is vital that you don’t fall to the side.
When you set your terms of payment and your customer has not paid by the due date, that late payment becomes debt, so you must take immediate action.
First attempt to negotiate with your debtor. Keep a record of all communication. Make a reasonable offer to settle the debt and ensure you document your actions.
Still not successful? You should use the following criteria to decide if you should issue proceedings:
Can you prove that you are owed money by the debtor? Do you have documentation of the debt such as an invoice, or witnesses who will back up your version of events? Do you have a signed contract or personal guarantee signed by the directors? if the debtor disputes the debt think very carefully about taking legal action because there is a risk, however small, that the court may agree with the debtor’s version.
Obtaining and ultimately enforcing the judgment can take some time and even after this process, the debt may not be paid in full immediately. This is something you must account for in your decision making process. Can you wait for your money?
You will need to factor in the cost of legal action as opposed to a commission-based debt collection service. Some of these costs are usually recoverable from the opposing party if you win. Make sure you get a quote from your solicitor and perhaps even set a price ceiling. Using a debt recovery agency that has a legal firm in place can also help to keep costs under control.
- Return on Investment (ROI)
What does ROI (Return on Investment) have to do with choosing to sue a customer who has stopped paying for product received? Everything! As mentioned, there are costs involved in taking legal action against a customer. In addition, the legal process is typically very slow, and the chances of collecting the debt owed goes down, the older the debt becomes. For these reasons, you should look at the ROI of legal action before you decide. You will need to consider the actual debt amount, the solicitor’s fees, chances of successful collection and court costs in the event the legal action fails. If the ROI is large enough to make legal action against your debtor then proceed.
Do you wish to preserve the relationship with the debtor? If it’s a long-standing customer and a significant portion of your income, make sure that you have exhausted every available option to recover.
Ask yourself, can you afford to lose this customer if they decide not to use your services again? Consider the repercussions. Legal action may result in negative publicity if your customer decides to go to social media to vent or even to news sources to complain about your company.
A letter from a solicitor is often enough to prompt a debtor to take action, especially if they are threatened with court proceedings. Look for a debt recovery agency that has an existing professional partnership with a legal practitioner and that provides free legal letters of demand as part of their service.
So, if you would like any further help, you may contact me on Debt Recoveries Australia at 1300 799 511. You may also email us at firstname.lastname@example.org
Call Us: +61 1300 799 511
|About the Author
In 2002, Adam Stewart established Debt Recoveries Australia Pty Ltd, a debt collection agency specialising in the insurance claims industry.
Adam has worked in the fields of motor vehicle insurance and debt recovery for over 12 years, working with some of the largest insurance and debt recovery companies in Australia. Read more