In Short
- Initial Contact: Begin by contacting the debtor through polite emails and phone calls to remind them of the outstanding payment. This approach can resolve issues arising from missed due dates or misplaced invoices.
- Formal Letter of Demand: If initial contact fails, issue a formal letter of demand outlining the debt owed, confirming the goods or services provided, setting a final payment date, and stating the actions you will take if payment is not made.
- Consider Legal Action: As a last resort, consider legal proceedings to recover the debt. Be aware that court processes can be time-consuming and costly, with no guarantee of full recovery.
Tips for Businesses
To enhance debt recovery success, maintain clear and open communication with debtors, document all interactions meticulously, and consider seeking legal advice when issuing formal demands or contemplating legal action. Implementing robust credit policies and regular follow-ups can also mitigate future debt issues.
Although chasing unpaid debts is frustrating, it is a common part of doing business. There are steps you can take to recover a debt without having to resort to court proceedings. However, these alternative steps can significantly take away time and money from your business and do not guarantee that you will get paid. This article will set out the steps you should take to give you the best chance of recovering some, or even all, of the money you are owed by an individual.
Get in Touch
An individual who owes you money is called a debtor. The first step in trying to recover an unpaid debt from a debtor should always be following them up by email and phone. It is possible they have missed the due date for payment or lost the original invoice in their email inbox. You should send a polite, follow-up email and attach another copy of the invoice. If they do not respond, you should follow this email up with a phone call to ask when they expect to be making the payment. If they are unable to make the payment for some reason or dispute the amount that is owed, you will have a clear understanding of what your next steps should be.
Send a Letter of Demand
If you have not received a response or payment after following up with the debtor with an email and a phone call, you may need to issue a formal letter of demand. A letter of demand is a formal request, usually written by a lawyer, that demands the payment of a debt. You can send this yourself, or arrange for a solicitor to send it. The letter should clearly set out:
- the total debt owed;
- a confirmation that the goods or services, subject of the debt, were provided;
- a final date for payment; and
- what action you will take if the debtor does not make payment by the specified date.
You should also include another copy of the relevant invoice.
Consider a Settlement
If the debtor responds to your demands to dispute the debt or claim that they cannot pay in full, you may wish to consider a commercial settlement as your next step. A commercial settlement will involve the parties re-negotiating the debt to be more realistic for the debtor, as a compromise of the original debt. For example, you may agree to accept:
- a lesser amount in final settlement of the debt; or
- payment by a payment plan over an agreed term.
It is important to record any agreement or payment terms in writing. This is so no future disputes about the debt can arise. Importantly, you should give serious consideration to the settlement negotiations even if you disagree with any dispute raised by the debtor, and you believe they owe the debt in full.
Given the risks and extra costs involved in legal proceedings, accepting a reduced settlement may often be more beneficial.
Go to Court
Issuing legal proceedings to recover an unpaid debt should always be a last resort. Court proceedings are time-consuming and expensive. Even if you do not use a lawyer, going to court will cost you time away from your business. Legal proceedings are also risky. This is because even where you believe you have a strong case, you may not succeed if the debtor disputes the debt owed. If you decide to issue legal proceedings, the outcome will depend on whether:
- the matter goes to a court hearing. If you are unsuccessful, the court may order you to pay the legal costs of the other party;
- you issue legal proceedings and the debtor does not file a defence or pay their debts. In this case, the court will order a default judgment, where the court will make orders that the debt is owed; or
- the debtor files a defence and the matter goes to hearing. If you are successful in the hearing, the court will make a judgment debt. This is where the court makes an order about the amount you are owed, which will include the original debt, plus your legal costs.
Enforce a Judgment
Once you have a judgment debt, you can take steps to enforce that judgment by using the legal system to force the debtor to pay you the money owed. These steps can include:
- seizing assets or property owned by the debtor;
- enforcing a garnishee order on their salary or bank account; or
- bankruptcy (for debts of at least $5000).
Although any extra legal costs will be added to the judgment debt, enforcing a judgment will cost you further time and money. Unfortunately, there are still no guarantees you will get paid. However, any judgment debt will be marked on the debtor's credit rating, which can affect their ability to borrow money and in turn affect any business they are running.
Key Takeaways
Unpaid debts can significantly impact small to medium-sized businesses. However, there are steps you can take to maximise the chances of individual debtors paying up and also avoid the time and cost of issuing legal proceedings. It is important to be commercially realistic at every step. This is so you can weigh up the risks of court proceedings against the benefits of a final settlement, even if that means receiving a little less than the total debt owed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
