Recovering your debts during periods of economic uncertainty, like COVID-19, can be critical to the survival of your business. However, a blanket debt recovery approach may not be at all helpful. During economic uncertainty, you must consider each debt and your strategy for recovery on a case by case basis. While it is important to recover your debts, you do not want to be left throwing good money at an unrecoverable debt. This article provides guidance on making strategic decisions when it comes to debt recovery during this uncertain economy.
Negotiating an Outcome
One of the best ways to recover a debt during economic uncertainty is to negotiate a mutually acceptable alternate payment arrangement with your debtor, such as:
- a deferred payment; or
- payment by instalments.
Negotiating can not only save you considerable time and money, but it can also help you preserve business relationships which may become invaluable in the future. Here are five top negotiation tips:
1. Listening is Key
A negotiation is unlikely to be successful unless the other party feels heard. They will not want to come to an agreement unless they are in some way benefiting from the payment arrangement.
2. Understand Your Customer's Situation
It is important to keep in mind that your debtor may be legitimately facing severe financial hardship. On the other hand, this is not necessarily the case for all businesses.
Having conversations with the other party and understanding their current financial situation can greatly assist you in reaching an appropriate resolution. This may also become useful in the future if your negotiation is unsuccessful and you need to escalate the matter to more formal recovery action.
3. Communicate Clearly and Professionally
When disputes arise, it is easy for emotions to take over. However, aggressive or unreasonable behaviour will only add fuel to the fire and detract from reaching a swift resolution. Your time is better spent focusing on facts and maintaining an open dialogue with your debtor. This will assist you in getting paid faster.
4. Consider Alternate Payment Arrangements
There is no stock standard payment arrangement that will work in every case. While it is important to be flexible, it is equally important that you only agree to a payment arrangement that works for your business. Common examples of payment arrangements include:
- deferring payment to a later date;
- accepting a reduced amount in a lump sum;
- accepting instalment payments over an agreed period of time; or
- a combination of any or all of these options.
5. Record Your Agreement in Writing
You should record any agreement you reach with your debtor in writing to help avoid a potential dispute in the future. While it may be appropriate to record a simple agreement via email, be sure to get your debtor's consent or acknowledgement in writing.
For more complex agreements that span over a longer duration or involve a significant amount of money, it may be more appropriate to record the outcome in a deed or signed agreement.
Formal Debt Recovery Process
If you are unable to negotiate a mutually agreeable arrangement with your debtor, you may be left with no option but to commence a formal debt recovery process. Commencing formal recovery action will inevitably damage a business relationship. You must consider the long term impact on your business relationship prior to commencing formal recovery action. This is particularly crucial if you wish to continue trading with the other party once the economic environment has improved.
Letter of Demand
The first step in the formal recovery process is to issue a letter of demand to your debtor. A letter of demand is a formal request that you send to your debtor demanding they pay your outstanding invoice(s). Letters of demand are commonly sent by legal representatives to add more weight to the demand. They are also generally the last formal communication with the other party prior to commencing Court proceedings. A letter of demand should include:
- the exact amount they owe you;
- why they owe that amount;
- when they need to make payment by; and
- what will happen if they do not make payment by that date (e.g. threatening to commence Court proceedings).
If your debtor fails to respond to your letter of demand, you can either:
- send a final demand which provides your debtor a further seven days to make payment; or
- commence Court proceedings.
Commencing Court Proceedings
Court proceedings can be a time consuming and expensive process. As such, this should be your last resort to recover a debt. This is even more important in times of economic uncertainty.
Before commencing court proceedings, you should consider a number of factors, including whether:
- your business can afford to incur the costs associated with litigation;
- the amount you are attempting to recover is proportionate to the time and expense of going to Court;
- your debtor has the means to pay the debt if the judge finds in your favour; and
- your debtor will likely enter administration, liquidation or bankruptcy.
Even once a judgment has been found, it still may be necessary to take some form of enforcement action before ultimately recovering the debt. There are a number of enforcement actions available, including:
- having the Sheriff seize their property;
- garnisheeing funds from your debtor's bank account;
- having your debtor wound up in insolvency (if they are a company); or
- having your debtor declared bankrupt (if an individual).
Insolvency and Bankruptcy During COVID-19
When someone owes you money, if all else fails, you can take steps to either wind up a company or bankrupt an individual. While winding up and bankruptcy proceedings are technically not a debt recovery tool, they can be quite effective at forcing a debtor to pay.
On 25 March 2020, the Australian Federal Government implemented temporary changes to bankruptcy laws as a response to the difficulties Australian businesses are facing due to COVID-19. Here, the timeframes for responding and the minimum monetary thresholds have changed considerably. See below:
|Type of Notice||Pre COVID-19||Current temporary changes|
|Bankruptcy Notice||If the debt exceeded $5,000, debtors had 21 days to comply.||Now, if the debt exceeds $20,000, debtors have six months to comply.|
|Creditors Statutory Demand||If the debt exceeded $2,000, the debtors had 21 days to comply.||Now, if the debt exceeds $20,000, debtors have six months to comply.|
These changes will remain in force until 25 September 2020 unless the government decided to extend them further. If you issued a bankruptcy notice or creditor's statutory demand prior to 25 March 2020, they will not be impacted by the temporary changes.