Chasing outstanding debts can be a frustrating task. It takes time and causes a strain on other valuable internal resources that could be put to better use in other business-critical activities. Often, the chase is long and not always successful, leading to a greater loss than you began with.
But it doesn’t have to be this way. Taking legal action and undergoing the formal debt recovery process can yield better results.
What is debt recovery?
Debt recovery is the process of collecting unpaid monies that are owed to a business or individual. In commercial situations, debts can have a negative effect on cashflow and the business’s ability to operate efficiently.
While the formal process, which can involve court action, may seem stringent, its purpose is to resolve disputes as amicably as possible through use of the Court.
The debt recovery process
The debt recovery process can take on many forms and the steps differ depending on whether it is a business or person who owes you money.
Before any formal action begins however, you should attempt to recover any debts with simple conversations between your internal credit control team and the company or individual who is in debt to you. These conversations can take place through the form of emails/letters and phone calls.
In some cases, this can prove to be effective as all that is really required by a debtor is a prompt or reminder.
If ineffective, you can enlist the help of a debt recovery solicitor or agent who can advise you on the best way forward. This might involve a mediation attempt or another form of Alternative Dispute Resolution (ADR), which can minimise the time, cost and stress involved with chasing unpaid monies.
Following this, if the debt has still not been paid or no agreement has been reached for them to be, a formal recovery process can begin.
Business to business debts
For business to business debts, this involves:
Step one: Issue a letter before action
Step two: Issue a County Court Claim
Step three: Obtain a County Court Judgement
Step four: Enforce a County Court Judgment
What is a letter before action?
A letter before action is a letter sent by a solicitor or debt recovery company to a debtor. It is a formal demand for payment of a debt and is usually the last communication sent to a debtor before commencing legal action.
The letter will detail all the necessary information, including the outstanding sum, the date the debt was due, any accumulated interest that is to be paid and how long the debtor has to pay the outstanding amounts before legal proceedings will take place.
What is a County Court Claim?
A County Court Money Claim form is a document that a debt recovery solicitor or agent can send to the Court on behalf of the person who is owed the money (the creditor). In order to issue the claim, they must also pay a fee to the Court.
The claim form will outline the names and addresses of the creditor and debtor and also, a Particulars of Claim section, which includes details of the debt and any interest claimed.
A debtor can dispute the claim and issue a defence at Court which would then result in the dispute regarding the debt being heard in a Court before a Judge.
What is a County Court Judgement?
A County Court Judgement , sometimes referred to as a CCJ, is a Court order. It can be registered against a debtor if they fail to pay money that they owe.
A CCJ negatively affects a debtor’s credit rating and credit worthiness.
Once a CCJ has been ordered, there are several methods that can be used to collect the unpaid debt. These include:
- Sending bailiffs to collect payment – Warrant of enforcement and Writ of Fifa
- Getting money deducted from debtor’s wages and paid to you – attachment of earning
- Freezing assets or money in a debtor’s account – the Court will then decide whether the money from the account can be used to pay the debt - Third party Debt Order
- Charge against the debtor’s land or property - Charging Order
Business to individual debts
For business to individual debts, the process involves the following steps:
Step one: Issue a letter of claim
Step two: Make a phone call to the debtor
Step three: Issue a County Court Claim
Step four: Obtain A County Court Judgement
Step five: Enforce a County Court Judgement
What is a letter of claim?
A new debt recovery protocol came into force on 1 October 2017. It applies to businesses that are claiming payments from an individual, who could be a sole trader.
The letter gives notice to the individual that Court proceedings may be brought against them if the debt is not paid.
It should include a summary of the facts, the parties to the agreement, including the basis on which the debt arose, the date the contractual agreement was made and a date by which the debtor should respond by. You should also include copies of any relevant documents that will help the receiver to understand the claim. The Letter of Claim must give the debtor 30 clear days to respond to the letter.
Can interest be charged on late payments?
A late payment is one that has exceeded the agreed payment date, or in instances where a date had not been clearly set out, it is anything after 30 days of receiving an invoice.
Intertest can be charged on late payments but the amount of this or the rate are which interest is accrued will depend on the contract that is in place.
The Late Payment of Commercial Debts (Interest) Act 1998 is a common term in business contracts which allows interest at the rate of 8% above base rate to be charged on all debts that are not paid within trading terms. In addition, a charge of a fixed sum of between £40 and £100 can be made, by way of compensation for late payment for each unpaid debt; and the creditor can claim other reasonable costs not covered by the above compensation.
Businesses can also replace this standard term with an express interest clause or another remedy for a late payment, which is bespoke to the company or customer.
Interest Claims are not always awarded by the Court and the court can use its discretion to disallow a claim for interest.
If there is no express contractual clause in place for interest to be charged then the creditor can add interest at the rate of 8% per annum under the County Courts Act 1984, Senior Courts Act 1981.
How to manage your own debts
To avoid legal action, or to prevent debts from amassing, you should place greater focus on your internal processes and create robust systems that manage and keep on top of client and customer payments.
While in-house credit control procedures can be sufficient, these can become much more effective with smart systems and specialist support that is on hand when you require it.
Our Activate Debt Recovery solution provides this in a digital platform that commercial clients can access 24/7. The system and the accompanying support are underpinned by experts in the field of debt recovery but ultimately, the greatest benefit is that businesses can take back control of their finances.