Dealing with bad debts and bad debtors is no one's idea of fun.
Sadly, though, for just about every business, it's a fact of life that sooner or later they are going to have to deal with the problem.
Having a plan and understanding what steps a business can take to get the money it's owed, are important parts of making debt recovery as smooth a process as possible.
Debt recovery is always a balance between the time, costs and trouble it takes to bring the matter to a conclusion and, bluntly, how much money is actually owed. Spending more on a recovery than a debt is worth obviously doesn't make economic sense. Then again, you may decide that, as a matter of principle, a debt needs to be recovered even if the costs don't add up.
What steps your business takes to recover a debt will probably depend on how much money is owed.
Here's a guide to the escalating steps you, as a business, can take.
1. Contacting the debtor
The first step, not surprisingly, is to contact the debtor and assume non-payment may simply be an oversight on their part.
After this, and assuming a simple reminder is ineffective, it's best to put the matter in writing at an early stage and to spell out clearly the facts AND what you expect to happen. This usually means specifying a date by which you expect payment to be made and suggesting what further steps will be taken if the matter isn't resolved.
It's important to be factual and professional and calm. The UK government's advice site, Directgov, advises that you clearly state who owes what and to whom, send copies of relevant paperwork and to urge the debtor to now deal with this matter in writing, which includes any problems they have with the debt.
It also advises businesses to avoid heated arguments or a lengthy correspondence with a debtor and not to threaten legal action that ultimately you're not prepared to follow through.
2. Going legal
Consulting a solicitor - after first establishing the scale of their costs - can be an effective next step if a debtor still won't pay. A letter from a lawyer can often prove to be a tipping point for debtors. A solicitor pecializing in this field can also advise on what further options may be appropriate.
3. Debt collection companies
Debt recovery agencies usually charge a percentage of the debt they recover on your behalf. Agencies must be licensed and governed by the Office of Fair Trading.
It's worth bearing in mind though that, as Directgov points out, some debt collection agencies may not use legally trained staff. Choose one who will employ a lawyer who can take legal action to recover a debt.
4. Alternatives to Court
When none of the above is effective, there are still alternatives to going to court. These include arbitration, mediation and ombudsman schemes - all of which come under the label of 'alternative dispute resolution' (ADR).
5. When all else fails
Going to court to collect your money should be seen as a last resort, mainly because the process can be lengthy and costly. Bear in mind also that winning may not be as straightforward as it might seem. It's important to get professional legal advice at this point to have an assessment of the likelihood of your success and the cost. It may be that the debt is less than the likely cost of recovery.
Directgov points out that:
- If the debtor files a defence and your case fails and the court rules against you, you could be liable for your debtor's costs as well as your own.
- A court is unlikely to make a ruling in your favour if it can't establish the facts of the case (this won't be necessary if your debtor hasn't filed a defence).
- If your debtor has filed for bankruptcy or gone into liquidation, your debt will be more difficult to recover.
Which court deals with your case will depend on the amount of money in dispute.
Small claims court - this court, which is part of the county court, is only for claims up to £5,000. You don't need to have legal representation. The small claims court will make rulings on claims and it can issue warrants to back up its decisions, but it doesn't award damages or compensation.
County Court - This court can deal with claims of any size, however small or large.
High Court - This court can deal with claims in excess of £15,000. A lawyer must be appointed to act as your representative here.
You can also now make money claims online for amounts up to £100,000, so long as the claim is against a maximum of two people.
The Money Claim Online system (MCOL), is accessible 24 hours a day, seven days a week. Claims are issued in the name of Northampton County Court. More information about his service is available from Her Majesty's Courts Service (HMCS), an executive agency of the Ministry of Justice.