How to Recover Debt
Recovering money owed to you by a business or individual can be frustrating and disheartening, and ultimately prevents you from conducting your day-to-day business activities. However, there are options to help you recover debt.
Assuming you’ve made every reasonable effort to recover your debt by communicating directly with the debtor, you need to consider if you want to continue engaging in business with the debtor, or if you want to simply collect your debts and sever all business ties. Either approach will inform your course of action.
Letter of Demand
If discussing your debt options with your debtor has not resulted in payment or a payment plan, a lawyer can draft a formal letter demanding the money is paid by a specified date. The letter should clearly outline the amount owed and a time frame for the debt to be settled. The letter should also communicate to the debtor that if the debt is not paid, legal action may be taken.A second, ‘final’ formal letter can also be sent.It’s important all written communication is conducted via registered mail.The desired outcome is that the debtor agrees to pay the amount and if so, a binding settlement deed will be prepared. The least desired outcome is that the debtor raises a dispute, or fails to respond to the Letter of Demand.
Alternative Dispute Resolution
Before considering taking your debtor to court if they refute or ignore your claim, you can consider Alternative Dispute Resolution (ADR), which includes mediation, conciliation or arbitration to help you resolve your dispute.
- Mediation involves you and the debtor, with the assistance of a mediator, listening to each other, identifying dispute elements and seeking to reach an agreement.
- Conciliation is a similar process, although the conciliator takes on an advisory role to formulate a fair resolution.
- Arbitration involves you and your debtor presenting your arguments to an arbitrator, who will make a formal decision on your dispute.
While ADR can be beneficial to help you and your debtor preserve a working relationship by offering solutions to your dispute, the hiring of external practitioners, potential travel costs and room hire fees means it can be a costly exercise. Also, if your debtor fails to acknowledge the dispute or insists they don’t owe you money, there is no guarantee a resolution will occur.
As a creditor, you can choose to commence legal proceedings against your debtor by serving a Statement of Claim. The debtor can serve a Defence (within 28 days) stating whether they admit or deny the claim. A Cross-claim can be filed by the debtor if they have a claim against you, the creditor. You can then file a Defence to the Cross-claim. Both debtor and creditor file or exchange affidavits, containing their evidence. If the debtor does not file a Defence, you can make an application to have default judgement entered against the debtor. A hearing before the court is conducted, upon which a judge will deliver his/her findings.
As a creditor, you can request an Examination Notice to collect information about the debtor’s income and assets. You can enforce the court’s judgement and collect your money through a range of options, such as asking the court to have funds taken from the debtor’s wages or bank accounts; seizing and selling the debtor’s property to pay the debt, orapply for a winding up order based on the debtor’s failure to pay the amount owed. If the amount is more than $5000, the court can declare the debtor bankrupt.
While taking your debtor to court can be produce the desired outcome, creditors should be aware that it can be a very time consuming and costly process. If you’re unsuccessful, you will liable to pay a portion of, or the entirety of, the debtor’s court costs.
A Statutory Demand can be issued by you, the creditor, and it’s certainly one of the quickest and most cost-effective options to recover debt. Under section 459E of the Corporations Act 2001 (Cth), it’s a formal, verified demand and serves to determine if a company can pay its debts. However, the demand must be issued in writing and must adhere to the prescribed form. It must clearly state the total debt amount, correctly identify the creditor and debtor, be signed by or on behalf of the creditor, and communicate that the debt must be paid within 21 days. An affidavit must accompany the statutory demand.If the debtor raises a genuine dispute, or your Statutory Demand is confusing or doesn’t comply with the above, you, as a creditor, risk having a court set aside the demand, and you will be potentially liable for associated costs.
If the demand is correctly issued and the debtor does not pay the debt within 21 days from the date of service, the debtor’s company is presumed insolvent and the creditor can make an application to wind the company up.While a Statutory Demand is not a debt-collecting tool, it can be a very effective approach in prompting your debtor to pay money owed to you.
If you’d like further information on recovering debts, please contact us.