Common mistakes in debt recovery

Debt recovery is often a delicate balancing act for a business. On the one hand, you must ensure your business is protected from bad debts, but on the other hand you do not want to jeopardise a good business relationship by mishandling a disputed debt.

If you take the wrong action, miss a deadline, or fail to follow the correct pre-action protocols, this can have a detrimental effect on your ability to collect your debts successfully.

In this blog, we consider common pitfalls that businesses make in recovering their debts using the legal process and how these can be avoided.

Failure to communicate what is owed and why it is owed clearly

While this should be obvious, if you have not clearly communicated to your debtor what is owed, why, and how to pay, this can have serious repercussions for debt recovery.

It is essential that your debtor is given the opportunity to pay you, or to say if they dispute the debt, and why.

To avoid any mistakes at this stage, your request for payment must include clear details of what sum is owed, what this relates to (appending any invoices or proof), how long it has been outstanding, how payment can be made, and that you intend to enforce this debt through court if payment is not made by a specific date. It is often reasonable to allow a period of at least 7 days, and if this is the first time you have made a demand, then 14 or even 21 days may be more reasonable. Make sure that you send this information to the correct person and at an address where you are sure your letter or email will come to their attention. 

Failure on your part to effectively communicate the debt owed to you can be used later down the line as an excuse for non-payment. It may also leave you open to an order for costs against you if you take a debt claim to court. Even if you are successful, if you were not clear in setting out what is owed and why, or if your request ends up in the wrong place and does not come to the attention of the correct person, the debtor will argue that they were not given a proper opportunity to settle it before you went to court and incurred costs.

Failing to perform a costs benefit analysis

If your initial letter asking for payment has been ignored, before starting court proceedings to enforce your debt, you should consider the additional cost to your business and undertake a costs benefit analysis.

This includes considering the amount of the debt that you are seeking to collect, the time required to pursue the collection, and the additional costs.

Part of your analysis should be to ascertain through due diligence that your debtor can actually meet any payments order made against them, including costs. If not, no matter how valid your claim is, it may be throwing good money after bad to pursue it. If that is the case, you can consider if a winding up petition may be necessary against your debtor.

Failing to comply with regulations and straying into harassment

It is not hard for debt recovery to turn into a dispute which can become personal. It is important not to let this get out of hand for many reasons. The main one being that it is very unlikely to lead to a quick agreeable resolution, but there can be additional repercussions.

If you, or a third party you have hired (such as a debt recovery company you have instructed), stray into what could be considered aggressive or harassing behaviour, you may find yourself in trouble. At best, this will distract from what you are trying to achieve and, at worst, it might even have criminal ramifications for you under harassment laws.

Failing to comply with debt recovery pre-action protocols

Before taking a disputed debt to court for a resolution or for enforcement, it is vital that you comply with recognised pre-action protocols. If you do not, this can result in delays, increased costs, and may lead to you being unable to collect your court costs - or worse, being ordered to pay the costs of your debtor.

These protocols are designed to save court time, by encouraging all parties to resolve their dispute out of court if possible. Only then should the case be taking up court time before a judge. As a result, if you do not follow the protocols, a judge is likely to look unfavourably on your case and your position on claiming legal costs.

The pre-action protocol for debt recovery includes the requirement to set out your case clearly by letter, giving the debtor a specific amount of time to respond before you can move to the next stage of issuing your claim in court.

Not only will this assist you if you end up in court, but a well-drafted pre-action letter will often lead to a negotiation and settlement, and court action can be avoided.

Missing limitation deadlines

All debt claims must be brought within a certain time period according to law.  This is usually six years from the date that the debt could first be enforced. When this is  varies depending on the type of debt, but in general terms this will be from when the last payment was made to you. If you fail to bring a claim within this time, you will be prevented from doing so at all.

Using ‘without prejudice’ incorrectly

‘Without prejudice’ is a term that is used by two parties to allow them to discuss a settlement off the record, without these discussions being brought to the attention of a judge if talks break down. The use of without prejudice negotiations can be very effective in resolving a dispute with a debtor and obtaining payment. However, it is vital that this method of engaging is used correctly. You do not want your off-the-record concessions to be used against you later in court as evidence. For example, if you suggest that you would accept a reduction in the full amount, and this suggestion was not made during a without prejudice conversation or communication, this could be disclosed to a court by your debtor as proof that the debt owed is actually lower than you are claiming.

Failing to make good use of alternative resolution methods

Before issuing a claim in court, it is worth considering other dispute resolution methods that might be better for your situation. These may get your debt paid quicker, and may help you to deal with a customer in a neutral way which can be advantageous if they are someone you want to continue to deal with.

One alternative dispute resolution method is mediation. A mediator is a professional independent third party, who will talk through the issues with both sides, negotiate between them and hopefully reach a solution agreeable to both. This can be more flexible than court, less public, and less aggressive.

Another option is to go to arbitration. An arbitrator is an independent third party, often an expert in a particular field, who will hear both sides of the arguments and then make a ruling. The arbitrator’s decision is legally binding. Again, this has the benefit of being more private than court, and the timing can be controlled by both parties.

Failure to comply with the terms of your contract

You must check the terms of your contract and exhaust all areas of dispute resolution set out in that contract before you move to court action.

For example, often a contract for goods or services will specify that parties must try arbitration before resorting to court. If you have not suggested this, and made efforts to resolve the dispute this way, a court is likely to either adjourn or dismiss your case, and penalise you with a costs order.

Failure to retain evidence

An essential part of any successful case is to be able to provide evidence as to why your claim is valid. This applies equally when communicating what is owed, as well as when persuading a court that you are owed what you say. If you lose vital evidence, such as contracts, or copy invoices, or relevant communications, then it will be your word against your opponents, and your position is greatly weakened.

How can we help?

We have many years of experience in debt recovery in all types of business. We can help you take a claim to court, or act for you in resolving a dispute and collecting the debt using negotiation or alternative dispute solutions.  We will advise on the quickest and most cost-effective course of action to ensure your debts are paid.

For further information and assistance, please contact a legal adviser in our Dispute Resolution team on 01904 624185.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.