When improperly handled, overdue receivable debts can severely impact a business’s ability to stay afloat. Overdue accounts not only cost money to collect, but they mean that cash flow is not available to the business, meaning it itself is at risk of accruing debts that it cannot pay. This is especially so when overdue accounts become long-term or ‘bad’ debts.
When debt ‘collection’ becomes debt ‘recovery’
Effective and consistent debt collection procedures can go a long way to preventing ‘old’ debt. However, even businesses with the most efficient debt collection procedures will end up having to deal with ‘old debts’ of 120 days or more.
Debts become increasingly difficult to collect once they are 90 days old and virtually impossible after 120 days. Therefore, it is usually at this point that recovery procedures are warranted, as normal collection procedures have been exhausted and are unlikely to achieve further results.
A business may resort to legal recovery options where a debtor disputes the debt, refuses to pay or fails to adhere to a negotiated payment plan.
How to recover a debt
While each debt dispute will be different and may require a customised strategy, there are some integral steps that can be applied to all debt recovery proceedings.
The most important thing to remember when dealing with debt recoveries is to act quickly. Not only do strict statutory limitation periods apply, but as stated above the longer you leave it the weaker your prospects of recovering the debt become.
Make a formal demand
This is most effective when done by way of a letter to the debtor which:
- demands immediate and full payment of the debt which is owed;
- specifies a date and method by which payment should be made;
- attaches a copy of the relevant account, invoice or balance sheet; and,
- foreshadows what legal actions will be taken if payment is not made by the specified deadline.
Such a letter achieves a dual purpose: (1) When issued on your lawyer’s letterhead it can jolt the debtor into taking steps to pay the debt; and (2) It can be shown to the court to support your claim for legal costs.
Institute legal proceedings
If payment is still not forthcoming or the debtor disputes the existence of the debt, a claim should be filed with an appropriate court. If the debtor fails to respond to the claim within the requisite time, a default judgement may be available. Otherwise the litigation process may be followed through to judgement or settlement between the parties.
Enforce the debt
Once you have obtained a judgement against the debtor, there are various means by which you can forcefully recover the debt. You may apply to the court for a variety of orders which can enable you to seize or obtain a charge over certain property of the debtor or garnish their wages. You also have the option of commencing proceedings to bankrupt (in the case of an individual) or wind up (in the case of a company) the debtor and register as a creditor in their insolvency.
Where can I get help with debt recovery?
Businesses often benefit from having a professional third party perform their debt collection and recovery, as debts can be collected quickly and efficiently without jeopardising client relationships.
Speak with an expert about how you can better manage your debt collection now. Your business’s ability to expand and remain profitable may hinge on it.