Debt Collection

Debt CollectionThere are various debt collection techniques. You should consider using these to help you collect money your company is owed.

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Issue a Letter Before Action

If your company is owed money the best result is an amicable agreement for this to be repaid. You should suggest your openness to this in a Letter Before Action.

This is a written warning to a debtor of the debt collection action that will be taken unless a sensible payment plan can be agreed.

It can be useful to employ a solicitor to issue this letter. This will involve additional cost. However the debtor will often take communication from a solicitor more seriously. They may continue to ignore a threatening letter which is just written on your company letter headed paper.

Make clear in your Letter before Action that if the debt remains unpaid court proceedings will be started and costs and interest added.

Issue a CCJ against the debtor

If your letter before action has been ignored the next step in the collection process is usually to apply for a CCJ (County Court Judgment) against the debtor. This is a Court Order stating that an outstanding debt should be paid.

On receipt of a CCJ the debtor may try to agree a payment plan with you. If this will result in the debt being repaid in a reasonable time it should be accepted. The fact that a CCJ has been issued and payment plan agreed will help if further recover action then becomes necessary.

Even if you have secured a CCJ against a debtor this in itself does not force them to pay. If they ignore the Order you will need to take further action.

Threaten a Winding Up Petition

What can a company do if an agreed payment plan has failed and a CCJ is ignored? The next step in the company debt collection process is to threaten to wind up the company that owes money.

First you will need to issue a Statutory demand. If the debt has not been paid or a payment plan agreed within 21 days you can then apply for a Winding Up Petition.

If the Petition is granted it will be advertised in the London Gazette. The advertisement will be picked up by the debtor’s bank and the company’s bank account will be frozen. Facing this threat a debtor is increasingly likely to pay what they owe.

A Winding Up Petition can be a powerful payment motivator. However it will normally cost c£3000 to implement. In addition there is no guarantee that the debt owed will be recovered.

Sell a debt you are struggling to collect yourself

You may feel you have exhausted your collection options or further action is simply too expensive. In this situation you can consider selling the outstanding debt to a specialist purchaser.

The purchaser then takes on responsibility for collecting the money owed. You will then receive a percentage of the debt which the purchaser manages to recover.

This solution is not generally useful for generating cash up front. However it allows cash to be collected which would otherwise may have been written off entirely.

Only debts owed by another commercial organisation can be sold. This option cannot be used if the debt is owed by an individual.

Can you add interest to an outstanding Company Debt

In 1998 the Government introduced legislation to give businesses a statutory right to claim interest from other businesses for the late payment of commercial debt. This is known as the Late Payment of Commercial Debts (interest) Act.

If you do not have provisions for interest charges in your standard payment terms you still add interest under this legislation. The court will normally uphold a company’s right to charge statutory interest on unpaid debts at 8% per year.

A warning that you plan to add interest and how this will be calculated should be included in any Letter Before Action that you send to debtors.

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