When to Consider Action?

It is first important to check the terms of any agreement or contract related to the debt. Payment terms are usually set out in such a document (i.e. how long the other party has to pay for goods or services provided) and can also occasionally set out the process in which payment can be recovered should the other party fail to pay. This may restrict (at least to begin with) the actions you can take against the debtor. It is also important that you have complied with the terms of the contract yourself before bringing a claim.

The Process

After reviewing the terms of any agreement / contract, the first step is usually to write to the debtor explaining that a debt is due and to request payment. This may prompt payment and resolve the situation without the need to take matters further. A deadline should be given to make final payment and should that deadline be missed or ignored, a final demand letter can then be sent to the debtor.

If the other party fails to respond, says that they will not pay, or disputes the debt, you can then consider the following options:

Conduct a Cost-Benefit Analysis

Before any action is taken, it is important to conduct a cost-benefit analysis of the situation.

• Will the time, effort and costs outweigh the size of the debt?
• What is the likelihood that the debt will actually be paid (what is the debtor’s financial position like)?
• Are there any commercial considerations to bear in mind before taking action (i.e. future relationships)?

There is also the distinction between disputed and undisputed debts to bear in mind when considering your options.

Options to Consider

Where a Debt is Disputed

Where a debtor disputes a debt owed on substantial grounds, the following options can be considered:

Court Action

• A letter before claim can be issued to the debtor which will need to be Civil Procedure Rule and Practice Direction compliant. This will set out the details of the claim; any offer of Alternative Dispute Resolution (like mediation); and will potentially provide settlement options.
• Should the debtor fail to respond or continue to dispute the debt, a claim form is then drafted, and it is important that service of this document satisfies the courts’ service standards. The court will then allocate the case to the appropriate court and will serve the claim on the debtor.
• The debtor has 14 days to acknowledge the claim and 28 days to respond fully. If they fail to do so, the court can issue a default judgment. Alternatively, a summary judgment can be made if the court considers the debtor has no real prospects of defending the creditor’s claim.
• Once judgment has been made, formal enforcement proceedings can then be commenced to recover the debt. Enforcement options include:
  • Third-party debt order – where there are sums owed to the debtor by a third party, these can be ordered to be paid to the creditor.
  • Charging order – where a charge is placed on the debtor’s beneficial interest in assets or land.
  • Attachment of earnings order – where a proportion of the debtor’s earnings are deducted directly from their employer and paid to the creditor.
  • Writ of execution – bailiffs can attempt to seize assets or items of property owned by the debtor.

Mediation / Negotiation

• Mediation can be used separately or in parallel with court action.
• Mediation involves an independent third party who assists parties in a dispute to reach a negotiated settlement.
• The mediator will review any relevant documents, listen to the arguments provided by each party, and guide the parties toward a mutually acceptable solution. They do not decide the outcome, but seek to facilitate agreement.
• Mediation is often quicker, less expensive than issuing proceedings, and has the added benefit that it remains confidential throughout.
• Mediation can be especially useful in debt recovery claims where: there is a dispute about the amount actually owed, the parties wish to preserve their relationship, and / or the debt is substantial.

Where a Debt is not Disputed

If a debtor ignores any demands for the debt, or acknowledges they cannot pay, the following options can be considered:

A Statutory Demand

• A written notice demanding payment and can be used when the debtor appears unable to pay the debt, and the sum owed is £5,000 or more for an individual or £750 or more for a company.
• This option avoids initial court proceedings and can potentially achieve a quick, inexpensive outcome.
• The statutory demand must be served correctly, often involving tracing agents who record attempts at service of the demand. This will later be important if a petition needs to be made to the court.
• If the debt remains unpaid following service of the demand, a petition for winding-up or bankruptcy can then be made with the courts (see below).

Insolvency / Bankruptcy Proceedings

• After a petition is made to the court and granted, insolvency / bankruptcy proceedings can be issued to recover some of the debt. Methods vary depending on the debtor:
  • Company – A petition for a winding-up order can be made, and if granted, a liquidator will gather any assets of the company and distribute the proceeds to any creditors of the company.
  • Individual – A bankruptcy petition can be made to the court, and if granted, the debtor’s assets can be sold and distributed to any creditors.

How TWM Can Help You

With all the options detailed above, careful planning and correct procedures are vital for successful debt recovery.

Our expert Solicitors can assist making or defending debt claims. Whether you know your preferred debt recovery option, or need to discuss your choices, contact our team for support throughout the debt recovery process.

For more information about debt recovery matters and how we can help, please contact our Dispute Resolution team.