Debt Collection 101: from a letter of demand to legal action

Restructuring Insights

No one likes to be owed money, but when you’re a business owner and have outlaid time and money for products or services that have gone unpaid, it can be particularly infuriating.

As financial specialists, our restructuring and recovery team understands all too well the pain and frustration unpaid debts can cause.

And whether you’re owed $500 or $50,000, it helps to understand your options for attempting to recover your money as quickly and cost-effectively as possible.

From the moment an invoice becomes overdue, there are certain steps you can (and should) take on the road to pursuing legal action.

Ask the person or business to pay

The logical first step in recovering an unpaid invoice is to contact the business yourself or have your bookkeeper or accountant do it for you.

This may include:asset_6.png

  • Sending invoice statements and payment reminders
  • Calling the accounts department or business owner
  • Accepting a payment plan or compromise amount

If the debtor keeps breaking promises to pay or avoids your communications altogether, it may be time to engage a debt collector.

Engaging a debt collector

When you engage a debt collector they will:

  • Ask questions to understand the debt including the goods or services provided, the amount owing, and the steps you have taken so far
  • Investigate the debtor, including obtaining current contact details
  • Send the debtor a letter requesting payment
  • Send a letter of demand

A letter of demand is usually the last step before deciding to pursue legal action. The letter explains to the debtor that they must make a payment or arrange a payment plan before a specified date, or they could be taken to court.

Commencing legal action

When all else fails, you may choose to take the debtor to court.

This involves:

  • Filing a complaint with the court
  • Serving the debtor with a notice that you are taking them to court (a writ of summons or statement of claim)
  • Presenting your case in court
  • Having the judge make a ruling

If the judge rules that the debtor must pay and they do not pay, you may need to force the debtor into bankruptcy or liquidation.

In this case, the court will appoint a trustee in bankruptcy or liquidator to assess the debtor’s assets and creditors (including you), and determine how assets will be liquidated and monies dispersed.

Is formal debt collection worth it for your debt?

It’s important to have a qualified financial advisor help you determine if pursuing a debt beyond the first stage of debt collection is the right commercial decision for your business.asset_35.png

As a starting point, your advisor will examine the debt and the debtor’s situation. There may be little benefit in taking legal action if the debtor does not have any assets that can be liquidated. The advisor will also attempt to find out if money is owed to other people, as this can affect the likelihood of recovering all of your debt.

If you decide to pursue legal action, keep in mind that the legal costs can quickly add up. However, if the ultimate outcome is realised – the person is made bankrupt or the company is forced into liquidation – the insolvency legislation states that the legal costs of the petitioning creditor (you) are paid in priority to other creditors.

This does not include your original debt though, which will be ranked equally with other unsecured claims and may rank behind priority debts the person or company owes, such as unpaid employee entitlements.

Whatever the outcome, having someone acting on behalf of your business is a vital part of the process. An experienced advisor can shed light on what can often feel like a complex and drawn-out process, and help you make the best decision for you.

To learn more about how RSM can help with debt collection for your business, contact the debt collection team at your nearest RSM office.