THE DEBT RECOVERY STEP-BY-STEP GUIDE
The debt collection process begin before you even accept an order from your client. By implementing a number of procedures firstly the number of debts accrued will be substantially reduced but when an outstanding debt does arise the successful recovery will be greatly improved as a result of implementing the following steps.
- Terms and Conditions
Before you start trading with a client you must ensure your terms and conditions are accurate, upto date and compliant with your industry and business sector. These are extremely important as if any disputes do arise it will most likely be your terms and conditions that win or lose you a case for a non paid disputed debt.
- Placement of an Order UK
When an order is placed by an new or existing client you need to make an initial credit check to established the credit worthiness of the client and assess a credit limit you will need to put in place. There are two main types of trading companies in the UK
- LIMITED (Private Limited Company) / PLC (Public Limited Company) / LLP (Limited Liability Partnership)
Information on the above is available through an online portal with a credit reference agency.
- Sole Trader / Partnership
These businesses are not registered with Companies House and therefore no financial or corporate data is available. As the owner / partners are personally liable for the businesses debts it is recommended to obtain their private addresses and contact numbers.
- Request the completion of Credit Application Form. This should provide all the necessary details to perform a credit risk assessment. Click here to download this.
- Placement of Order from outside UK
It is as important or even more so to run credit checks on overseas clients to ensure they are legitimate and creditworthy businesses. Obtaining VAT numbers and full contact details will help identifying the clients and enable a credit rating report to be successfully obtained.
- Trade Reference
Where information is limited on your client or the credit report obtained is not conclusive trade references can play an important role in evaluating your client or potential client. Historically bank reference were a normal form of assessment but these are very rarely used or obtained now. However, a potential client should provide 2 trade references for their existing suppliers which will provide an indication of their ability to meet commitments.
- Set up an Account
- For an existing client re-assess the credit limit you have in place. If there is not one then set one up based on the credit report obtained. Ensure all the client details and contacts are up to date and accurate and not any changes such as management, location and contact details.
- For new client set up a credit limit based on the credit report obtained. Make sure all the contact details, addresses, numbers and key people match the report and order placed.
- Depending on the size or nature of your products/ services and the results of the credit checks it may be prudent to obtain a personal guarantee of the director(s).
- Implement Credit Terms
Based on the credit report, the sales person’s knowledge and any other information you know about the client you need to set up your credit limit and terms of trade based on your terms and conditions such as:
- A deposit is required when placing an order. This could be 10% or 50% or any amount you believe will help avoid a serious loss in the event of a bad debt arising.
- Pre payment in full if the credit report indicates this or your own knowledge and experience identifies issues with the client and their potential to settle an invoice on credit terms.
- Credit terms based on your terms and conditions and your experience of the client. Normal credit terms are 30 days net of invoice but can be set at any times scales to meet your requirements.
- Processing an Order
When an order is placed ensure you have all the necessary information and documentation to relate back to if there are any issues. These should include purchase order number or reference, full details of the person placing the order. Written confirmation of acceptance of the order plus clear and defined details of the order. These details and documents are so important if payment is not made and a debt collection process is started.
- Completing an Order
It is very important that when completing an order, whether it is a service or goods that you receive confirmation of receipt and that it has been accepted with out issue. Ensure that all processes and documentation are retained until at least payment has been received. It is recommended to longer than this in case a dispute is raised after receipt of goods/services and payment has been made.
- Raising an Invoice
When raising an invoice ensure it includes all the relevant client details, order numbers, references and a full description of the service or goods supplies. Also make sure the invoices includes your bank details or method of which you require payment and the date payment should be received by. Invoices should be raised at the earliest date possible and sent to the client by email, txt and/or post. Endeavour to obtained a confirmation of receipt as this avoids unnecessary problems if payment is not made.
- Invoice monitoring
Gentle reminders advising clients of due dates for outstanding invoices is well recommended. If your terms are Net 30 days of invoice date the send a reminder email 7 days prior to due date just as gentle reminder of when payment is expected.
- Due date
If payment has not been received by the due date send an immediate follow up email just stating that payment has not been received and is probably just an oversight on the client’s behalf. Request confirmation that payment has now been made or that it will be made by return.
- When is a payment considered late?
The law states that late payment legislation comes into force 30 days after having been invoiced or having goods delivered for public authorities and 60 days for business transactions, however a lot of businesses have a different way of working than this. You can agree a credit period with your customer in writing or, in a lot of cases, the credit period can be up to 60 days, starting from the date the invoice was sent and concluding at the end of the following month.
Once payment has not been made it is important to have set procedures in place to recover this as quickly and effectively as possible and identify any issues or reasons for non payment. The following steps and timescales should be taken.
- Late payment first letter
Within 7 days after payment is due send a written letter via email to the appropriate person or accounts payable department responsible for paying invoices. The content of the email should request immediate payment or reasons for non payment by return email.
- Still No Payment
If still no payment or reason for non payment received within 10 days then you will need to telephone the client and speak to the appropriate person or department responsible for your invoice. Try and establish a valid reason for the non payment or receive a promise for an immediate settlement of the outstanding amount.
- Final Letter
The debtor still has not settled the invoice and there are either no known disputes or non accepted issues raised. At this point a final pre instruction letter should be sent by email before outsourcing to a third part debt collection agency. This letter should be very specific with amount owed and a specific date for payment to be received. Normally this date is seven days from the letter date but any date can be stated. The letter should also stipulate the name of your debt collection partner. See attached sample letter.
- Outsourcing to Debt Collection Agency
Once it has been established the debtor is not going to settle the invoice voluntarily by your own methods the debt needs to be outsourced to a third part debt collection agency who will then start their processes to recover monies due to you. We would recommend that you instruct a debt collection agency that operates on a No Win No Fee basis charging an agreed commission against monies recovered only. Ensure at this point late payment interest and costs are added to the claim.
- Charging interest on late payments
By law, you can charge interest on any late payments if the debtor is another business. This is not only a statutory right but can also be contractual. It is up to you whether you decide to implement this law and to consider whether it would be right for your business to operate in this way.
However, you cannot start charging interest immediately if the debtor is a consumer. If you wish to charge interest to a consumer over a debt, you will need to state this in any Letter Before Claim, as well as including an interest calculation on a Particulars of Claim which is sent with a county court claim form. The court can award you statutory interest if this is done and you make a successful claim against the debtor – however, the court may not award the interest you have calculated if it is considered to be excessive.
- How much interest should I charge?
There are two different ways to calculate how much interest you should charge on a late payment. The first is the statutory rate which is the Bank of England base rate plus 8%. This is set for 6 months and will then be reassessed. The second is contractual rate which you can set as higher or lower that the statutory rate. You should charge income on the gross amount of money owed including any VAT.
- How to charge interest on late payments
If your company does not already charge interest on late payments then there are some important changes that you will need to make if you decide to start charging. You will need to make sure that your customers are aware that if they pay late, they will be subject to paying interest; this should be done in writing and in your terms and conditions. You may also have to change your credit management and billing systems.
It is important to make sure that any invoices sent out have a clear payment date on them to ensure that your customers are aware of the time in which they have to pay. If payment is late, you should consider sending out a final warning before interest starts to be charged. It is also a good idea to let your customer know that they have begun to accrue interest on a debt. You should also include the fact that you have the legal right to charge interest and for any debt recovery charges that they might incur. When the customer does pay off the debt, including the interest, a receipt should be issued explaining how interest was charged.
- Full documentation and case details
When outsourcing a debt case to a third party debt collection agency it is important you provide as much background details and documentation as possible. This is where points 1-9 are crucial to ensure you have the best possible chance of a successful recovery.
- Regular Updates
Following the instruction of a third party debt collection agency make sure you are kept upto date with their progress receiving regular reports. It is very important that you are kept fully informed of the debtor’s position and intentions so that you are able to advise and instruct the debt collection agency accordingly.
- Unable to Contact Debtor
If your debt collection partner is not able to communicate or correspond with the debtor then there could be a number of reasons including:
- The debtor is just ignoring all correspondence or attempts to communicate
- The debtor has left the last known address
- The debtor has ceased trading.
- Debtor ignoring debt collection partner
If the debtor ignores both you and the debt collection partner and refuses to enter into any communications then the only option is issues a specialist solicitor’s letter before action (LBA). See step 24.
- Debtor has left the last address known
If the debt collection partner discovers the debtor is no longer at the address you have and is believed to still be an active live company then we would recommend using an investigation company to trace and locate a current address. This service is normally provided on an No Find No Fee basis. Once located the debt collection partner can resume their collection processes to recover monies due.
- The debtor has ceased trading
Following their processes, the debt collection agency establishes the debtor has ceased trading they will endeavour to identify if there are any assets to seize or to claim against. If the debtor is a sole trader/partnership or you have a personal guarantee signed by the director(s) then debt collection partner can pursue your claim against them personally. See point 5c.
- Reasons for non payment
The debt collection partner enters into a communication and correspondence process with the debtor to identify reasons for non payment and endeavour to resolve and effect a speedy payment. There are numerous reasons and excuses provided by the debtor why payment has not been made. Herewith examples of the mains reasons:
- Cannot identify receiving an invoice
- There is no purchase order number to process the invoice
- They believed payment had already been made
- The person dealing with this case has either left the company or is on vacation
- There are issues or disputed with the goods/services provided.
- Resolving Issues Disputes
The debt collection partner will need to respond to all the debtor’s complaints, issues and excuses irrelevant how insignificant they are. The reasons for this will be explained under Litigation below. Providing you have followed all the guide lines in steps 1-9 then the debt collection partner should be in possession of all the information and documentation to respond quickly to any issues raised resulting in a speedy resolution and payment to you.
- Payment Proposal
If during this process the debtor or debt collection partner propose a settlement plan then assess exactly what you will recover from this before accepting any offers. Settlement proposals are as follows:
- Full payment including costs and interest.
This is the best outcome as you will recovery all or a large percentage of the debt collections fees plus interest.
This is a normal resolution following the conclusion of step 20.
- A percentage of the principal amount in full and final settlement.
Upon acceptance this will usually be in single payment within a few days.
This is a normal resolution following an accepted dispute or the avoidance of entering into legal proceedings and to receive a quick settlement.
- Payment Plan
The debtor makes an offer to settle the outstanding debt plus costs and interest over an agreed period of time by way of a weekly, fortnightly or monthly payment plan to settle the debt.
This is a normal resolution for debtors who have cashflow or trading problems.
- Disputed payment
The debtor is disputing the claim but is in agreement that an amount is payable and as such makes an on account payment whilst the dispute is being resolved.
This is a normal resolution when the debtor know he has to pay you but has a dispute or an excuse not to settle in full.
- Promised Payments not met
Despite promises to the debt collection partner and yourself the debtor continues to avoid settlement. At this point it is then recommended to issue a specialist solicitor’s letter. This will normally cost between £75-150 and include all the necessary details of the claim plus cost and interest to date being charged. This letter before Action (LBA) is a legal requirement before commencing litigation proceedings.
- Response to LBA
If the debtor responds to the solicitor’s letter before action and either agrees to pay or details further issues or disputes these can be resolved at this step without incurring further costs. The solicitor will either accept payment on your behalf or advise details of what the debtor’s disputes and what are your options.
- No Response to LBA
The solicitor has to allow 14 days for a commercial debtor to respond and 30 days for a consumer debtor. If no response is received after this time then your debt collection partner will advise of the next steps to take.
Providing your debt collection partner is in communications with the debtor the next step would be to consider mediation. A mediator is a neutral person with no knowledge of the debt or disputes at the time of appointment. They will assess the case and charge a fee that is met 50-50 by you and the debtor.
- Mediation Process
The appointed mediator will meet with both you and the debtor at a pre arranged neutral venue. This is normally a hotel or a convenient premises with a private room. Prior to mediation the mediator will have received case files from both you and the debtor. The actual mediation process is informal and both parties will have the opportunity to discuss their points. Following the meeting a decision will be made by the mediator. Although this is not a legally binding process if the decision is not accepted by the debtor and legal action is implemented then this process can be used in court.
- Legal proceedings
If none of the above steps have resulted in a successful recovery or resolution then the only course of action is through the legal system. There will be costs involved at this stage and a successful recovery cannot be guaranteed. Therefore it is recommended that a number of pre litigation checks are made prior to commencement of legal actions.
- Pre-Litigation checks
Prior to the commencement of legal proceedings advisable to check the following first:
- Is the debtor still actively trading
- Is the debtor’s financial situation sufficiently solvent to meet this debt
- Does the debtor have a defence
- How strong is the defence
- Start Legal Proceedings
You can make a claim yourself via the Government’s Money Claim Online service provide the amount of claim is less than £100,000. The main problems with undertaking this option are:
- You do not have any legal expertise
- You must ensure the claim is completed accurately
- The claim is issued against the correct debtor
- Ensure the exact and correct details about the claim are entered
- Rejected claims
From our experience making your own claim is thwart with issues and can lead the claim being rejected or thrown out. Possible reasons for rejected claims are:
- Incorrect calculations of claim, costs and interest entered
- Errant debtor details entered. Misspellings, wrong addresses
- Incorrect debtors provided. Claim entered against an named individual instead of the limited
- Using an Expert to issue claims
The preferred method of issuing a claim is a legal expert such as a solicitor. There expertise and knowledge will ensure all correct details have been entered and submitted the correct amount of interest and costs are claimed. In a successful undisputed action you will also recover a percentage of these issuing costs back. You will also receive expert advice on the processes and how you claim is progressing.
- Once the claim has been issued
Once the claim has been issued the court will provide a claim number. The claim documents will then be served on the debtor and they have 14 days to respond.
- No response from debtor
If no response is received from the debtor after the 14 days a judgment against them can be entered in the form of a County Court Judgment (CCJ). This can be for the full amount owed plus court costs and interest. If the amount is paid within one calendar month, the CCJ is removed from the debtor’s record. If payment is not received within the specified time and the debt is paid at a later date, the CCJ can be marked as satisfied but would remain visible on the debtor’s credit rating, which could have a detrimental effect their credit rating.
There are various methods of enforcement of a CCJ, if the debt remains unpaid.
- If the debtor is an individual, they could be required to attend court to provide evidence of what they can afford to pay and the court has the power to make an order to take money from their wages.
- If the money is owed by a business, a representative of the company can be asked to attend court and give details of the company’s accounts.
- The court can freeze money in the debtor’s bank, building society or business accounts and decide if money from the account can be used to pay the debt.
- The court can take a charge over the debtor’s land or property, requiring the debtor to pay this charge before they get their money if the land or property is sold.
- The court can send bailiffs to recover the money.
- You can apply to court to make a winding-up petition to close or ‘wind up’ the company, whereby the company’s assets would be sold and any surplus funds are paid to you and any other creditors.
- Defence is issued
If the debtor responds to the claim notifying their intention to defend the action against them, a further 14 days are allocated for them to submit their defence. Both parties complete a directions questionnaire, giving the court various information and details about their side of the case, such as how much time they think is needed for the hearing and who, if anyone, they would like to use as witnesses. The court will set a timetable for the next steps to be followed, such as disclosing relevant documents and providing both witness and expert evidence. If both parties agree, a request can be made to pause the proceedings for one month in order to try to negotiate a solution.
- Court hearing
If no agreement has been reached before this stage, a final hearing will be held at which a judge considers all the evidence, decides the outcome and makes an order, including for costs and interest.
- Costs for Representation
If the case goes to a final hearing, depending on the size of the claim it may be recommended to have legal representation in court. This involves paying a legal expert, usually a barrister, to present your side of the claim and will know what is required and how to present. You will have to pay for his services which will be charged at an hourly rate. It is unlikely that you will be able to recover all of these costs in a successful action.
- Unsuccessful claim
If the courts decide to accept the debtor’s defence and award in their favour you could be liable for some or all of their costs too plus your own. So it is very important before continuing with a disputed claim that you are confident of your claim.
- Successful Claim
In a successful claim the court will normally allow 14 days for the defence to settle the claim. If payment is not received then you can then instruct enforcement officers to recover your money. They will add their fees to the debt so you should still receive the full amounted awarded by the court.
- Statutory Demands
A statutory demand is a written formal request for a debt to be paid. Once the demand has been made, the debtor has 21 days to respond. They must either settle the debt or come to an agreement about how the debt will be recovered.
The creditor may present a petition for bankruptcy against any individual if the debt is over £5,000 or wind up a company that owes £750 or more. If the creditor has a court order that the money must be paid, they can send bailiffs to the home or business premises of the debtor to recover their debt. If the cost of the debt is not recovered the creditor then has the right to petition for bankruptcy. You have a 4 month time period to submit an application for bankruptcy or to wind up your debtor.
A statutory demand can only be served on debts that are less than 6 years old, and does not expire.
- Serving a Statutory Demand on an individual or sole trader
The most important factor when serving a statutory demand to an individual is the way in which you serve it. You need to ensure that the debtor is aware that they are receiving a demand. It is advisable to serve the notice in person so that you can prove how and when you served the notice. If this isn’t possible you can hire a process server who will do it on your behalf. If you can’t get hold of the debtor you can post the letter by 1st class post or by putting it through the letter box. If you go on to petition for bankruptcy you will have to ensure that you can prove how you served the demand and when you believe the debtor would have seen it. Alternatively you can advertise the demand in a newspaper. This can only be used as an option if the debtor has changed address without informing you or is actively avoiding you.
- Serving a Statutory demand on a registered limited company
You can serve a registered company either by delivering the demand in person to their registered offices or by sending it by recorded post. The demand will be noted as served as long as the company signs for it.
- Serving an unregistered limited company
To serve on an unregistered limited company you can deliver the demand to their main place of business, or any senior officer of the company. The court may also direct you in the way in which to serve the demand.
You will need to have filled in the correct forms to serve a statutory demand and you will also need to provide proof of service.
- What your statutory demand should contain
When you present your debtor with a statutory demand you should ensure that it includes information regarding why they have been served and the consequences of not conforming to the demand. You should also indicate that they have the right to apply for the demand to be set aside. It must include contact details of someone they can contact to discuss their debt.
An authorised person must sign and date the demand. The main body of the demand should state when the debt must be repaid, how much debt is owed and what products or services it arose from, along with details of the unsatisfied judgment or failing this, why you believe the debtor will not be able to pay the debt.
- Certificate of Service
You will need to prove that you have served the statutory demand in order to ensure that it is upheld, or if you want to file a petition for bankruptcy. To petition for bankruptcy you must also include a certificate of service, which proves that the person was served the statutory demand.
This needs to be supported by a statement of truth, which must be signed by the person who served the demand, unless the debtor acknowledges that they were served, in which case it can be signed by any authorised person.
If you served the debtor personally then you will have to fill in Form 6.11 but if you used a different method to serve the demand you will need to fill in a Form 6.12, which details the date and how the demand was served.
If the demand was not served personally and the debtor is refusing to acknowledge that they have received it then a person who served the demand or issued it to be served should write the statement of truth. This will have to explain how and when the demand was served and the date in which they believe the debtor would have received it.
It is important that you carry out the serving of the demand correctly as if the court believes that it was not served in a proper manner they may dismiss your petition for bankruptcy.
- Serving a statutory demand abroad
You can serve a statutory demand abroad in the same way that you would in the UK, other than the fact that the debtor has 28 days to comply as opposed to 21. If you wish to go on to petition for bankruptcy, however, there are some restrictions.
People living and conducting a business in the EU will not be subject to bankruptcy petitions if they are earning a living in that country (this excludes Denmark). If the person you wish to file a petition for bankruptcy against is retired or unemployed then they will have to be made bankrupt according to the law of the country where they reside.
Finally, if the debtor lives outside the EU (or in Denmark) you can file for a bankruptcy petition as long as they have lived in the UK within 3 years before you wish to serve the notice. The only exception to this is if you are able to serve the person on a day that they are in England or Wales.
If you have obtained a court order then you may not have to serve a statutory demand. You can ask the court to enforce the order but if they fail you can serve an application to wind up a company if the debt is over £750.