Your business finished work for a client and provided goods or services, but they haven’t paid yet or payment is late. With the payment due date passed, what can you do?
Debt recovery is the process of pursuing payment of outstanding debts. Recovery actions typically involve issuing formal demand letters, engaging in negotiations, or escalating to legal proceedings if necessary.
Creditors can face long delays when chasing a large debt and this can give rise to serious cashflow problems for the creditor. This article provides information for Australian creditors on different avenues in recovering debt.
Never underestimate the power of a good relationship. Most debtors have fallen on hard times and genuinely want to pay their debts. If you demonstrate empathy and understanding and use the goodwill you have with that debtor – this can go a long way.
We cannot stress enough the importance of regular, follow-up communication. Your debtor may have a list of accounts payable. Debtors may prioritize your invoice if you regularly engage in a friendly manner.
If your debtor asks you to wait until they can pay without making a concrete commitment, you should consider:
You may wish to offer a payment plan or other means of managing the debt. Taking this proactive step can help you receive payment.
Leverage can be a powerful tool for debt recovery. “Leverage” means using a tool that’s at your disposal to gain or maximise an advantage for you and your business.
Your business should, at the outset of a particular business relationship, consider ways it can build leverage. This will come in handy if the business relationship sours later down the track and there are payment issues.
In the case of procuring payment of an unpaid invoice, “leverage” can take many forms, including if your business:
If your client is not in a hurry to pay your outstanding invoice, you might wish to use your leverage.
You can remind your client about the leverage you have in a friendly way. This might motivate them to make a payment. Avoid using harsh language when communicating, you don’t want to harass or threaten. Hopefully they then realise how that leverage might impact their business.
You click here to read more about payment terms and leverage.
Letters of demand are a cost-effective but formal way to start the recovery of debt process.
A letter of demand will remind your client about the outstanding debt. You can advise the debtor of the amount and the deadline for payment. This notification informs the debtor that failure to pay by the due date will result in further action. You can also remind them that they may incur additional costs such as legal fees and interest.
The letter of demand can attach important documents like contracts, invoices, and correspondence related to the matter.
Whatever legal action you say you will undertake, it’s important not to include items that you’re not prepared to act on. You should try to avoid the demand being a hollow threat. As that can be ineffective in procuring payment of your outstanding invoices.
In some States, sending a formal letter of demand may also be a legal requirement before commencing court proceedings.
In some instances, it may be beneficial to send a letter of demand on your own letterhead. This might be the case if you aim to maintain a personal and friendly working relationship with the debtor.
You can purchase a basic letter of demand template here.
Prosper Law can assist with a bespoke letter of demand. We can also conduct follow-up negotiations with the debtor on your behalf. Using debt recovery lawyers sounds expensive, but it can lead to quick payment.
By engaging a lawyer to send a letter of demand, creditors demonstrate their intent to pursue legal action. This demonstrates your seriousness in pursuing payment through legal action if the debt remains unresolved.
Hiring a lawyer to write your demand letter can help you start legal action quickly or get more advice if necessary.
This option is available if the debtor is a company.
A statutory demand is a demand made to a company by a creditor. Similar to a general letter of demand, but authorised under the Corporations Act 2001 (Cth) (Corporations Act).
You might consider issuing a statutory demand where:
Your business must be owed a total debt of at least $2,000 to issue a statutory demand. The total can include one or more invoices. If the total debt total less than $2,000, you’re unable to issue a statutory demand.
Under the Corporations Act, a statutory demand must be in writing and include:
Once you meet the above conditions, you must serve the statutory demand on the company.
If a debtor does not pay the debt within 21 days of receiving the statutory demand, they have not complied. If a company fails to comply with a statutory demand, you can prove that the company is insolvent.
If they’re insolvent, the debtors’ contracts may trigger a breach event. For example, some termination clauses outline insolvency as a breach event. This means the debtors clients may also terminate their contracts with the debtor.
You can learn more about statutory demands here.
If you can’t get the money back yourself or with a legal letter, consider sending the debt to a collection agency. This can help save money for your business instead of abandoning the debt.
Although you may not receive 100% of the total amount of the debt, you can allocate your own business’ resources to something more valuable.
If the debt collection agency can’t settle the debt, they can report it on the debtor’s credit report. This could hurt the client’s credit score and make it harder for them to get loans or credit. This might make them more likely to pay off the debt.
Starting court proceedings is (and should be) the absolute last resort for any business seeking to recover a debt. That’s because debt recovery proceedings require a further additional outlay from the creditor. No guarantees exist that you will receive payment from the debtor. This is true even if the debt recovery proceedings rule in your favour.
Commencing debt recovery proceedings may be the best avenue where your client disputes the payment.
A judgment issued by a court is a binding decision that determines the obligations of a debtor to pay the debt. Court judgments come with enforcement mechanisms that allow creditors to compel debtors to pay the outstanding debt. These mechanisms may include garnishing of wages, seizure of assets, or other forms of enforcement authorised by the court.
Court judgments can also include interest on the debt and reimbursement of legal costs incurred by the creditor. This helps compensate creditors for the time and expenses involved in pursuing the debt recovery action.
Beware, however, that court documents are generally publicly accessible information. If you don’t want it published that you’re suing a debtor, commencing these proceedings may not be the best avenue for your business.
Debtors have rights under the Australian Consumer Law, including protection against harassment and misleading conduct by creditors. They also have the right to dispute debts and negotiate payment plans or settlements.
Creditors who use unfair debt collection practices may be subject to penalties under the Australian Consumer Law.
Creditors must not engage in harassment or misleading conduct when attempting to enforce payment. This also means creditors cannot trespass onto debtor’s premises or property to retrieve unpaid goods.
Penalties can include fines and legal action. Creditors need to adhere to fair practices and respect debtors’ rights.
Recovering debt can take different amounts of time depending on various factors. These factors include the complexity of the debt, the willingness of both parties, and the possibility of legal action.
In some cases, parties can reach a resolution relatively quickly. While in others, it may take months or even years. Seeking a court judgment can take many years.
Alternative dispute resolution methods (such as mediation or negotiation) can help settle disputes outside court. These methods can be more cost-effective and less time-consuming than litigation.
Debtors may be willing to negotiate after considering they will need to pay legal costs to defend the claim. As well as pay a possible order for costs.
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