Debt collection

What it means

Debt recovery is the set of steps a creditor takes to obtain money from a debtor who has not paid on time. It starts out of court with reminders and phone calls, continues with a letter before action and, if that fails, moves to the courts and enforcement.

For an undisputed monetary claim, court recovery often starts with an application for a payment order, which is faster than ordinary proceedings. If the debtor does not object, the order becomes enforceable and the creditor can apply for enforcement.

Alternatives to recovering the debt yourself are a collection agency or an assignment of the receivable to a third party for part of its value. If the debtor is bankrupt, the creditor must file its claim within the statutory deadline or may lose it.

How it works in practice

For clients we set up a simple procedure with deadlines: an automatic reminder a few days after the due date, a phone call, a second reminder with interest and the flat-rate compensation, a letter before action, and a decision on going to court. A regular procedure works better than chasing at random.

In the books we track the age of receivables in the subledger and create impairment allowances for those whose recovery is uncertain. The tax deductibility of allowances and write-offs has its own conditions, such as time overdue or court proceedings.

Before taking legal action we assess whether it is worthwhile: the amount owed, the court fee, costs, the debtor’s assets and time. For small amounts and a debtor with no assets, an instalment plan or assignment is often better.

What to watch out for

Claims become time-barred. A creditor who waits too long can lose the right even if the debt is undisputed. For older claims we therefore always check limitation periods first, and whether the debtor has acknowledged the debt.

Stricter rules apply to recovery from consumers, and disproportionate pressure or misleading threats can be penalised. Even with businesses we recommend communicating factually and in writing, because correspondence may later serve as evidence.