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Can I recover legal costs as part of debt recovery?

Operating a small to medium-sized business can be highly rewarding both personally and professionally. However, it also has potential to present some challenging situations, especially when a debtor is unable or unwilling to pay money for products or services provided.

Unfortunately, if the amount is significant, you can potentially lose valuable time, resources and money on legal fees attempting to recover your debts. That’s the bad news. The good news, however, is at least a portion of your legal costs can be recovered from your debtor in many instances. So, as a business owner, it’s important to be proactive to protect yourself.

Always have professionally drafted contracts!

Prior to entering business agreements that require a business or individual to pay you for goods or services, it’s beneficial to engage a lawyer to draft a thorough contract. Well-drafted contracts will contain a clause (or clauses) that ensure:

  • Your entitlements and rights are protected in instances where your debtor will not – or cannot – pay.
  • You are entitled to claim all costs involved with the recovery of debt, including legal fees, from your debtor once they have defaulted on payment.

Having a carefully drafted contract will add weight to your communications and negotiations with your debtor, and will be valuable if you decide to take legal action.

Can I charge my debtor any collection costs?

If you engage a debt collector,they are prohibited from recovering fees from a debtor unless a contract exists between both parties stating this can occur. Therefore, you may be able to charge the debtor the debt collection costs only if the terms are clearly communicated within your written and signed contract, so we cannot stress enough the importance of having a thorough and detailed contract.

Issuing a Letter of Demand

If you’re unable to obtain payment from your debtor, a lawyer can draft a formal letter demanding any outstanding money owed to you is paid by a specified date. The letter must outline the amount owed and a time frame for the debt to be settled. The letter should also communicate if the debt is not paid, you may commence court proceedings and the debtor will be liable to pay any associated legal costs. It must be noted that before you can begin formal court proceedings, you must send your debtor a letter of demand. In some instances, this demonstrates to your debtor you’re serious about recovering money, and the desired outcome is they will settle their payment.

Commencing court proceedings

If your letter of demand has failed to result in payment – or an agreed payment plan – you can commence legal action, which can be timely and expensive. Recovering legal costs as part of your debt recovery process can also be difficult.  Keep in mind if, for instance, you commence proceedings in the Small Claims Division of the NSW Local Court, the court has no power to award costs. If you’re self-represented, you’re not usually able to recover professional legal costs. Also, if you’re unsuccessful, you may be liable to pay the defendant’s legal costs.

However, the good news is if you are successful in obtaining a court judgement against the business or individual that owes you money, you can recover some of the costs involved with legal action. In this instance, the total sum owed to you will include the debt, a portion of legal costs, and even interest.

Summary

As a small to medium business, demanding payments in writing, over the telephone, via email or even in person can be exhausting, and engaging in legal action can be time consuming and costly. As a result, it’s important to cover your bases at the beginning of any transaction by securing professionally drafted contracts, which protect your rights during negotiations and during legal proceedings. Being able to substantiate any debts owing to you is always beneficial, and being prepared, proactive and thorough will allow you to recover at least some – if not all – of the legal costs involved in collecting debts.

If you’d like further information on recovering legal fees incurred during debt recovery, please contact us.

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