February 28, 2022
February 28, 2022
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4.6 - 17 votes
In the world of business, it is difficult and almost impossible to complete a transaction without advancing loans or delivering goods and services on credit. No matter what sector you operate, you might come in contact with clients or customers that owe you for goods or services sold to them or for the loan advanced to them. Some debtors refuse to pay up their debt even after you make several requests to retrieve the amount owed.
Having debtors that refuse to pay is a problem that can have detrimental effects on a creditor's business, and in a bid to recover these debts, some creditors resort to self-help. Note that self-help is not an option, and instead of following this path, creditors should seek proper legitimate means of recovering their money to avoid sanctions.
To this end, this article will explain the concept of debt recovery and highlight the best legal approaches to recovering debts.
A debtor is a person or an institution that owes money and is obligated to repay their debt. For example, if Kate, a customer or client of Andrew, a business man, receives goods or/services with a promise to pay Andrew at a later date and the specified date has passed, but Kate is yet to make payment for the goods she bought, then Kate is a debtor.
Another example of a debtor is a party who has taken out a loan and is yet to make full repayment. In this case, the party advancing the loan is the creditor and the party taking out the loan is the debtor.
The creditor is the party who grants a loan to the debtor with an agreement that the money will be repaid at a later date. For example Andrew who has advanced his goods to Kate with the assurance that Kate will pay back on an agreed date, is a creditor.
Debt recovery is a process or procedure of collecting or recovering a debt from debtors. This occurs when a loan remains unpaid after several demands for repayment have been made by the creditor or when customers or clients refuse to pay for the goods or services delivered. There are several factors responsible for s debtor's refusal to pay debts. These include unavailability of the funds at a given time, bankruptcy or the debtor's sheer refusal to pay their debts.
The most popular means of debt collection is instituting a debt recovery action against a debtor in court, which is a legal means of recovering a debt. However, the creditor can initiate a debt recovery case in court as a last resort after exhausting other means of recovering the debt.
The first thing a creditor should do if a debtor has missed a repayment date is to send a gentle reminder. The reminder can be sent via email or over the phone. If the debtor does not make the payment, you can send a follow-up email, referring to the reminder. Sometimes, the debtor forgets to pay the debt on the agreed date, and if this is the case, the debtor might send the payment or make arrangements with the creditor on payment terms, and in such cases, the creditor will not need to proceed to the next step.
Sometimes, debtors respond positively after a reminder has been sent to them. They can also request to have meetings with their creditors to discuss and negotiate payment terms. Some debtors have the desire to pay their debts but are unable to do so because they are bankrupt or do not have access to funds at a given time. In situations like this, it will be expedient to have a meeting with such debtors to discuss and renegotiate payment terms like payment in installments, extension of the repayment date, or accepting valuable goods or property as full settlement of the debts.
Parties should understand that things do not always go as planned often, and when issues like this occur, parties can be flexible enough to renegotiate new terms and also maintain a cordial and mutually beneficial business relationship through an amicable settlement.
The creditor should review any written agreement with their debtors to ascertain whether the debtor has defaulted in making payment and whether the creditor is required to follow any other steps before resorting to litigation. Examples of such contracts include a Sale of Goods Agreement, Retainer Agreement, Promissory Note, Loan Agreement.
The written agreement outlines the date of repayment, payment methods, and other terms of payment. Also, some contracts may state that in event of default, the creditor can resort to an amicable settlement and alternative dispute resolution before litigation. If this is the case, the creditor should follow the procedure stated in the substantive agreement.
If a reminder has been sent to the debtor, but has failed to make payment, the creditor can serve a monetary demand letter on the debtor. This letter encapsulates the debt owed, the date the loan was advanced or the date the goods or services were received, the agreed date of repayment and a firm deadline indicating that the creditor plans to commence a legal action against the debtor if the debt remains unpaid. This letter is very useful in debt recovery actions as it serves as evidence to show that the debtor has refused to make payment after a demand was made.
Debt collection firms have proven to be a convenient and cost effective way to recover debt. It is a proven fact that using a solicitor to recover debts has a high success rate because often times, debtors comply and pay up or seek negotiations when they receive letters from the creditor's solicitors.
Sometimes, parties execute an Arbitration Agreement or include alternative dispute resolution (ADR) clauses in their agreements. This means that if disputes arise, the parties must first settle their dispute through ADR before resorting to litigation.
The ADR methods include mediation, negotiation, conciliation and arbitration. ADR ensures an amicable and peaceful settlement between parties.
After exhausting all possible means, the last creditor's resort is to institute a debt recovery action against the debtor in a court of competent jurisdiction. The creditor can hire a legal counsel to represent him in the debt recovery action. After the case is heard, the court may make an order for the recovery of the debt and award damages in addition to this.
Vivian Umelue is an attorney and legal templates programmer at Wonder.Legal and is based in Nigeria.