New YouGov research for Amazon has found that nearly one in four UK SME retailers (23%) is...
22 FAQs about debt recovery
- Is it always worth pursuing overdue debts?
- How can I recover debts without alienating valued customers?
- Should I be prepared to compromise?
- What key factors determine how strong my negotiating position is?
- Can I charge interest on overdue debts?
- When should I use a solicitor?
- What other third parties collect debts?
- Will using a solicitor (or another third party) alienate my customers?
- How much does a solicitor charge?
- How can I find a suitable solicitor (or debt collection agency)?
- What alternatives do I have before taking legal action?
- How do I start taking legal action?
- What evidence of the debt do I need to have?
- What should I do if the debtor claims I have not fulfilled the contract?
- Does it matter whether the debtor is an individual, a small business, a larger company or a public sector organisation?
- What legal options do I have?
- Do I need a solicitor for a court case?
- How difficult, expensive and time-consuming is the small claims procedure?
- How long is a 'fast track' or 'multi-track' court case likely to take and how much might it cost?
- How should I prepare for a court case?
- Does winning a court case guarantee payment?
- What are my options for 'enforcing Judgment'?
1. Is it always worth pursuing overdue debts?
You want to be sure that you have a reasonable chance of recovering the debt, and that it will justify the expense and effort of pursuing it.
It may be best simply to write off small debts (say, less than £100), although you should consider whether this would create a precedent which encourages other small debtors not to pay. For larger debts, you need to investigate why the customer has not paid. If there is a dispute over the goods you supplied, it will be difficult to recover the debt without resolving it. If the customer is in cash flow difficulties, you may want to try to negotiate part payment and reschedule the debt.
If there are already outstanding County Court Judgments (CCJs) against the customer, you may have problems recovering the debt - ask the local court to check the Register of County Court Judgments. If the customer has become insolvent, the chances of recovering any significant amount are likely to be poor, although if you have a valid retention of title clause, which allows you to retain ownership of goods until they are paid for, you may be able to recover the goods.
If the customer has obtained a Debt Relief Order, there may be little point in pursuing them. This means that the total value of their assets (excluding any car worth less than £1,000) is no more than £300, and their disposable income (after tax, national insurance contributions and normal household expenses) is no more than £50 per month. And the order means you cannot enforce your rights against them for (usually) a year, while they try to sort their affairs out.
2. How can I recover debts without alienating valued customers?
Take a diplomatic but firm approach. Discuss the situation with your customer, and try to resolve any problems so that you can reach an agreement. Explain what steps you intend to take to recover the debt, letting the customer know before you start any legal proceedings.
Bear in mind, however, that customers who do not pay their debts may not be as valuable as you thought! Good customers will usually appreciate their suppliers adopting firm credit control.
3. Should I be prepared to compromise?
There is no point in demanding immediate payment in full if the customer simply cannot pay. Negotiating part payment and rescheduling the debt - confirmed in writing - can at least help you recover some of the money you are owed, and improves the chances of maintaining a good relationship if the customer's problems are only temporary. A compromise agreement could allow for interest and can also allow you to avoid the effort and expense of taking further action.
4. What key factors determine how strong my negotiating position is?
Your position will be improved if the customer wants to continue doing business with you in the future, either because you have built a good relationship over time or because it will be difficult, expensive or disruptive for them to find an alternative supplier.
Your negotiating position will also be stronger if you have ensured that the transaction was covered by clear terms and conditions. If you supply goods (as opposed to services), these might include a 'retention of title' clause ensuring that you retain ownership of the goods until full payment has been received.
It may also help your position if the customer wants to avoid the publicity of legal action being taken against them. County Court judgments and winding up (or bankruptcy) petitions will appear on credit agency reports and may affect their ability to obtain future credit.
5. Can I charge interest on overdue debts?
Your contract may specify a credit period and how interest will be charged on overdue payments. In addition, commercial debts are covered by the Late Payment of Commercial Debts (Interest) Act 1998. Where there are no written terms of credit, this allows interest to be charged at a set rate which is the Bank of England base rate plus 8% from the end of a notional 30 day credit period. For the purposes of this legislation the Bank of England base rate is fixed every six months.
Similarly, your contract may specify your right to recover any costs of collecting overdue debts; and for commercial debts, the legislation allows specified amounts for 'reasonable debt recovery costs' (eg up to £40 for debts less than £1,000).
In practice, however, few firms ask for payment of interest (or debt recovery costs) under the legislation unless the dispute has reached the courts. If you do intend to charge interest and collection costs on overdue debts, your best course is to make this clear, in writing - in your terms and conditions, quotations, acknowledgments, invoices and so on.
6. When should I use a solicitor?
Using a solicitor can be a cost effective way of recovering debts. Many firms of solicitors specialise in this type of work and process large volumes of debts for their clients every month in a cost efficient manner.
The customer may pay up straight away (or in instalments) once they hear from a solicitor.
You may have a better chance of keeping the customer if you and your solicitor do not immediately pursue the matter through the courts, but try instead to negotiate payment or resolve any dispute amicably.
7. What other third parties collect debts?
As well as solicitors, another option is to use a reputable debt collection agency. For example, if you are in an industry where getting paid on time is a frequent problem, you might use a debt collection agency to collect late payments from all your debtors. However, debt collection agencies typically do not deal with debts once they become disputed (as opposed to merely overdue for payment); at that stage, you may need to consult a solicitor.
Alternatively, if you factor your debts (receiving a large percentage of the debt from the factoring company at the point when the invoice is sent out and receiving the balance once they have collected the debt), the factoring company will collect all the payments directly. However, in industries (such as construction and engineering) where payments are frequently delayed or disputed, debts may be unsuitable for outsourcing in this way.
8. Will using a solicitor (or another third party) alienate my customers?
Not necessarily, as outsourcing of debt collection is common. However an aggressive solicitor, agency or factoring company can alienate customers. In the worst case, you could be liable if they use unlawful methods such as harassment.
9. How much does a solicitor charge?
A firm of solicitors that specialises in debt collection typically charges an hourly rate or a percentage of the value of the debt (typically around 10%), as does a debt collection agency. Costs depend on the size, age and complexity of the debt.
One-off recoveries can be more expensive than if you regularly use the same law firm (or agency) to pursue all unpaid debts.
A law firm that does not specialise in debt recovery, or which has not invested in the IT systems needed to bring down the costs of handling large numbers of debts, may charge much more than a specialist firm.
10. How can I find a suitable solicitor (or debt collection agency)?
If they do not specialise in debt recovery themselves, your solicitors may be able to recommend a suitable firm or agency.
Alternatively, you can use the Law Society's online solicitor database to find a solicitor in your area offering debt recovery services.
Confirm with the solicitor (or agency) how they will go about recovering your debt. In the case of an agency, check whether it is registered with the Credit Services Association.
11. What alternatives do I have before taking legal action?
Your routine credit control should include a series of steps to chase payments as soon as they become overdue - sending reminders, phoning the customer and so on.
If this fails to get a satisfactory response, it may help to involve more senior people in the customer organisation. For example, you could send copies of your correspondence to the finance director; depending on the circumstances, the finance director might then instruct a subordinate to make payment. Likewise, if you were having difficulty getting payment from a school, you could contact the Chair of the Board of Governors. Sometimes, a friendly high level approach (from, say, your managing director to the customer's managing director) can yield results.
If the dispute is with a customer with whom you expect to do more business, the wording of your correspondence can have a significant impact. Provided that you are being reasonable and professional, a dispute and even a legal case need not necessarily mean the end of the business relationship. It may be worth emphasising that you have supplied the products (or services) for which you seek payment, and that you still wish to maintain the friendly and mutually beneficial relationship that you have enjoyed up to that point.
But remember, the chances of recovering a debt decrease with each day that passes. If you are unable to recover the debt within a reasonable timeframe, you may need to consider contacting a solicitor (or debt collection agency).
12. How do I start taking legal action?
The first step is to send the debtor a formal letter requiring immediate payment of the debt and advising them that you will take legal action if you do not receive it. Make sure you give the debtor a firm date for payment and when you will take action. While you can send this letter yourself, you may prefer to ask your solicitor to send it: a solicitor’s letter makes it clear to the customer that you are serious, and often prompts an immediate response.
As with your other correspondence, it is worth thinking about the wording of the letter and which individual you send it to, particularly if you hope to continue doing business with the debtor.
13. What evidence of the debt do I need to have?
Ideally you will have a written and signed contract. But you may have other documentary evidence - for example, a purchase order. You will also want evidence that you fulfilled your side of the bargain (eg a signed delivery note). It will be helpful if there is clear evidence that you made the customer aware of your terms and conditions before the contract was agreed.
Ensure, also, that you keep copies of any correspondence you send while chasing the debt or attempting to negotiate a compromise.
Even without direct evidence, it may be possible to infer the agreement from related evidence - where the customer has proceeded in a way which suggests that there is an agreement, or from the correspondence you send and receive while chasing the debt. Discuss the quality of your evidence with your solicitor before taking court action, particularly if there is a dispute over the debt (see 14).
14. What should I do if the debtor claims I have not fulfilled the contract?
In a straightforward situation, you might have evidence that you have in fact fulfilled the contract - for example, a signed delivery note confirming that the correct goods were received on time and in satisfactory condition.
Often, however, the evidence will be less clear cut. For example, there might be a dispute over the quality of a service you supplied, or you might have delivered the correct goods but after the agreed date. In a situation like this, your first priority will be to resolve the dispute. You may then need to aim for a compromise, taking into account any genuine shortcomings in your performance and the extent to which they adversely affected your customer. Your solicitor will be able to advise you on what is reasonable in the circumstances.
If you can show that you negotiated in good faith and tried to reach a reasonable agreement, you will be in a stronger position if the dispute does reach the courts.
15. Does it matter whether the debtor is an individual, a small business, a larger company or a public sector organisation?
Generalising is risky, as every debtor is different. Issues to consider, however, include:
- Individuals and smaller businesses are more likely to suffer cash flow difficulties, and may therefore be unable to pay you even if you do win a court case. By contrast, the debts of most public sector organisations are ultimately guaranteed by the government.
- Sole traders are personally liable for their debts, and may therefore be worth pursuing if the individual has significant assets even if his or her business is in a weak position. Conversely, some unscrupulous company directors take advantage of the protection offered by limited liability to walk away from their debts.
- Larger organisations may take advantage of their financial strength, threatening to take away their business, routinely delaying payment or dragging out court disputes. On the other hand, public sector organisations in particular may be concerned at the possibility of adverse publicity.
- The larger the organisation, the more likely it is that problems with debts result in part from internal communication problems.
Regardless of the size and legal status of the debtor, you should follow the same basic principles: investigating the debtor's ability to pay; ensuring that you have a clear case and good evidence; and trying to negotiate agreement whenever possible rather than going to court.
16. What legal options do I have?
The court procedure you follow depends on the amount of the debt. Generally, small to medium debts will be recovered through the County Courts. Larger claims will be pursued in the High Court.
For disputed debts up to £10,000, the court case is allocated to the 'small claims track'. This is a relatively simple, informal and inexpensive procedure for resolving disputes in the county court (see 18).
Disputed claims between £10,001 and £25,000 are dealt with by the 'fast track' procedure, also in the County Court. Claims for over £25,000 use the 'multi-track' procedure, and can be issued in the High Court. These involve more formal and complex procedures, and can involve significant expenses.
For undisputed debts of more than £750, there is an alternative which is to issue a statutory demand (a formal demand for payment in a specified format). If the debt is not then paid within 21 days, you can petition the court to wind up the company which owes you money (or to make an individual bankrupt). The prospect of being wound up or made bankrupt can have more effect than standard court procedures. This procedure should not be used, however, if there is a genuine dispute.
17. Do I need a solicitor for a court case?
A solicitor is not normally required for a disputed claim in the 'small claims' track (and only very limited amounts of solicitors' fees can be included in your claim). You may, however, want to consult a solicitor if you are unclear about the merits of your case, or to discuss other options.
For larger claims, it is advisable to use a solicitor to represent you. Take advice before proceeding as the case and trial will be expensive, particularly if you ultimately lose.
18. How difficult, expensive and time-consuming is the small claims procedure?
Using the small claims procedure to recover a disputed debt is usually relatively straightforward. If you are claiming for a fixed amount (under £100,000), you can make a claim online. If you are making a claim for an unspecified amount, you must download and fill in a paper claim form N1.
The initial fee you pay depends on the amount you are claiming, and currently ranges from £35 (for claims up to £300) to £120 (for up to £5,000), or less if you file your claim online. If the defendant disputes a money claim of between £1,500 and £5,000, you generally also have to pay an 'allocation' fee. Other costs might include any legal advice, your own loss of earnings and expenses for attending the court, and the costs incurred by any witnesses.
You will have to meet all these costs as you proceed. If you ultimately win the case, the defendant is usually ordered to pay your court fees, but you can only claim limited sums for other costs and expenses. You may face additional costs if the defendant still fails to pay and you have to take further action to 'enforce judgment' (see 21 and 22).
The most time-consuming element of pursuing a claim is usually gathering your evidence and completing the court forms. The procedure is also fairly lengthy - you may have to wait three to six months to get a hearing date. The court hearing itself is usually relatively brief (though you may have to wait on the day). You can choose not to attend the hearing, but only if you submit written evidence at least seven days beforehand.
Read about making a court claim for money including information on court fees on the GOV.UK website.
19. How long is a 'fast track' or 'multi-track' court case likely to take and how much might it cost?
Where a debtor disputes a claim in excess of £10,000, the process can be drawn out. A 'fast track' case may take 30 weeks or more to go to trial, while it can be as much as two years before a multi-track case is heard.
Similarly, costs will escalate the longer the dispute continues, and become much higher if the case reaches a full trial. Your solicitor is obliged to keep you informed of costs as you proceed, and to advise you of estimated (but not guaranteed) future costs.
Although you can claim legal costs if successful, you will have to pay your own costs as you proceed. Even if you ultimately win the case, you will probably have to pay some of your own legal costs, while if you lose - or if the judge decides that you did not make enough effort to settle the dispute out of court - you might have to pay all your costs, court fees, and even most of the defendant's costs.
Because of the costs and timescales, it is always a good idea to try to reach an out of court settlement at an early stage and to take legal advice throughout the process.
20. How should I prepare for a court case?
Get as much written evidence as possible, including evidence that you have tried to resolve the dispute. Doing this will help your solicitor understand the dispute, strengthen your negotiating position and improve your chances if the case does go to trial. Remember, evidence can include emails, photographs and so on.
21. Does winning a court case guarantee payment?
No. When you win the court case (either because it is undefended or because a dispute has been resolved in your favour) you are awarded ‘Judgment’. But if the defendant still refuses to pay up, or falls behind in payments, you will need to attempt to ‘enforce Judgment’ through the court. There are a variety of methods available, all of which require paying the court an additional fee (which is added to your claim) and following the appropriate procedure. Unless the defendant has money or assets to sell, or at least an income, you will not be able to recover your debt. If the defendant is forced into insolvency you may receive at best a small percentage of the money owed to you. This is why it is important to investigate the defendant’s ability to pay before you begin court action.
Additionally, in some limited circumstances it may be possible for the defendant to appeal against the Judgment, delaying payment or even setting aside the Judgment.
22. What are my options for 'enforcing Judgment'?
The best method will depend on the defendant's legal status (eg whether an individual or a company) and its financial circumstances. Your solicitor will be able to advise you on the most appropriate course. It is also possible to ask the court to order the defendant to attend court to provide information on their ability to pay. Options include:
- If the defendant has assets or goods which could be sold, you might use a Warrant (or Writ) of Execution. Bailiffs (or Sheriffs) will be sent to collect the money you are owed or seize goods to sell at auction.
- If the defendant has money in a bank or building society account, you might use a Third Party Debt Order (previously referred to as a Garnishee Order). The bank (or building society) is ordered to put the amount of your claim aside; the defendant is offered a hearing before the money is paid to you. This method also works if you know that the defendant is owed money by someone else. You can ask the court to order that person or company to pay the money direct to you, as opposed to paying the defendant.
- If the defendant is employed, you might use an Attachment of Earnings Order. The defendant's employer is ordered to deduct a regular amount from the defendant's earnings and pay it to you to satisfy your judgment.
- If there is no easier way, you might use a Charging Order. This means that your judgment will be secured against an asset (typically a property or shares) and prevents the defendant from selling the charged assets without paying you.
If you (or a group of creditors) are owed more than £750 by a debtor you can ask the court to start insolvency proceedings, known as ‘compulsory winding up’.