Debt recovery

1.1 How much money are you owed?

• In terms of time and money, it may be best to write off very small sums, but the Small Claims Track (see 4) offers a cheap route without the need for solicitors.

1.2 Who is your customer?

• If it is a customer whose business you value, be diplomatic in your approach.
• If it is a one-off customer, you can be more assertive.

1.3 Why has the customer refused to pay?

• Is there any dispute over the goods?

  If so, resolve it immediately. Otherwise, the debt will be difficult to recover.

• Is the customer in cashflow difficulties?

  If so, try to negotiate a payment on account (part payment) and reschedule the remainder. Confirm this in writing.

• Are there already outstanding judgments against the customer?

  If so, the debt may well be irrecoverable. Check the Register of County Court Judgments, Orders and Fines (www.trustonline.org.uk).

• Is the customer bankrupt or in liquidation?

  If so, the debt is probably irrecoverable.

• If the customer does not have a good reason for not paying, you may opt to pursue the debt. You can use a debt collection agency or a solicitor specialising in debt collection (see 2), serve a statutory demand (see 3) or go to court (see 4 and 5).

2.1 Using a reputable debt-collection agency (or a specialist debt recovery solicitor) is a fast method of recovering debts.

• Your customer will often pay up straight away, either in full or in instalments.

2.2 Using an agency is often sensible when you want to keep the customer.

• You are unlikely to keep a customer who has been pursued through the courts.

2.3 Costs are normally calculated as a percentage of the money recovered.

• The commission on the money recovered is typically 8-10% for commercial debts (and 3-15% for consumer collections), but it can vary depending on the size and age of the debt.
• The percentage commission may be higher for a one-off recovery than if you use the agency for all your unpaid debts.
• Some agencies charge an annual subscription (often £25 to £100).
• Some agencies charge a flat fee in the form of vouchers. You buy, say, £400-worth of vouchers, which you send in with each invoice to be collected.
• If you are asked to pay any money in advance, check the agency's record (see 2.5).

2.4 The agency can also instruct solicitors on your behalf if a customer still refuses to pay.

• This will save you time but it may be cheaper to instruct the solicitor direct.

2.5 Make checks before using an agency.

• Is it registered with the Credit Services Association (0191 217 0775)?
• What methods does it use?

  You could be liable if it uses unlawful methods such as harassment.

2.6 Your solicitor, or your accountant, may be able to recommend a good agency or may offer debt collection services themselves.

• Unless your solicitor specialises in debt collection, this may be expensive.

3.1 You can only use this for undisputed, higher-value debts, ie outstanding debts of more than £750.

3.2 You send a formal demand for payment in a specified format.

• The format is set out in the Insolvency Rules. You can get appropriate forms online (eg from the Insolvency Service at www.bis.gov.uk/insolvency/about-us/forms/england-and-wales).
• Alternatively, ask your solicitor to organise it. This is a relatively low-cost procedure.

3.3 If the debt is not paid after 21 days (and you think there is money available), you can petition the court to wind up the company or make an individual bankrupt) (see 8).

• The prospect of being wound up (or made bankrupt) often has more effect on debtors than court procedures to recover the money.

4.1 Making a claim using the Small Claims Track is inexpensive. Your local court can send you forms to fill in and leaflets detailing each stage and the fees involved.

• A solicitor is not usually required.
• The court fees can be added to the amount of your claim. So, too, can interest on the debt from the time it became due. Both should be included at the outset.

  However, you can only claim very limited solicitors' fees.

• Present written evidence that you have tried to resolve the dispute before resorting to proceedings or you may be penalised even if you have a valid claim.

4.2 Once the court serves the claim form, your customer (the defendant) can respond in one of four ways:

• Pay the claim.
• Admit the claim, or part of the claim.
• Ignore the claim by not responding within 14 days. In this case, a default judgment can be enforced.
• File a defence to your claim. A defence can include a counterclaim (saying that you owe the defendant money).

  This usually leads to a hearing (see 4.4).

4.3 If the defendant suggests a compromise, you can accept the offer or progress to a small claims hearing (see 4.4).

• Agreeing to accept payment in instalments is often advisable.

4.4 A small claims hearing is an informal meeting between yourself, the defendant and a district judge.

• This takes place on a fixed date at court.
• The judge listens to you, to the defendant and to any witnesses, and reviews the evidence which each of you puts forward (eg invoices, letters, expert opinions).
• The judge then tells you his or her decision and explains the reasoning.
• Provided you submit written evidence and give at least seven days' notice, you do not have to attend the final hearing in person.

4.5 If the defendant has agreed in writing to pay the claim, or you have been awarded judgment at the hearing, you can then request the court to enter judgment.

• This records your legal right to the debt, but does not guarantee payment (see 6).

5.1 You start proceedings by issuing a claim.

• Claims over £25,000 can be issued in the high court. Claims for less than this must be issued in the county court.

5.2 It is advisable to use a solicitor or barrister to represent you.

5.3 If the defendant issues a defence to your claim, the procedure is more formal and complex than for small claims.

• Your legal adviser and the court staff can explain what is involved.
• You may not wish to proceed further if a defence is issued. But you may have to pay costs if you abandon the claim.

5.4 Try to establish the length of time it will probably take for the case to go to trial.

• The courts try to limit this to 30 weeks for fast-track cases.
• In extreme circumstances, it can be two years before a multi-track case is heard.

5.5 Whichever party loses is likely to end up paying the court fees and most of the legal costs of both parties.

• Even if you win, you will probably have to pay part of your own legal costs.
• If you cannot show that you first tried to settle the dispute out of court, the judge may order you to pay your own costs.

6.1 Often, the reason the defendant did not pay in the first place was lack of funds.

• There may be no valuable assets to sell either.

6.2 The defendant may be able to appeal against the judgment.

• This could delay payment. At worst, the judgment could be cancelled or altered.

7.1 The most common method is to use a Warrant (or Writ) of Execution. This is effective if the defendant has assets such as goods on his premises which can be taken and sold for a significant sum.

• The court will send bailiffs to collect the money you are owed.
• Alternatively, the bailiffs can seize suitable goods to sell at auction.

  Bailiffs are prohibited from taking basic domestic items (eg clothes), items which defendants need for their jobs (eg tools, car) or rented items (eg a television).

• Judgments for debts over £600, which are registered at the high court, can be enforced by enforcement officers as they have a higher success rate than bailiffs.

7.2 If the defendant's bank account is in credit, consider using a Third Party Debt Order.

• The bank (or building society) is ordered to put aside the amount of your claim from the funds in the defendant's account. The defendant is offered a hearing.

7.3 If the defendant is employed, consider using an Attachment of Earnings Order.

• The defendant's employer is ordered to deduct the amount from the defendant's wages and pay it over.

7.4 If there is no other way to obtain the money, consider a Charging Order.

This prevents the defendant from selling the assets which you charge (usually a house or stocks and shares) without paying you the money you are owed. Usually, the defendant is an individual rather than a limited company.

8.1 se procedures can be used to enforce payment if the debt is more than £750, and is not in dispute.

8.2 Unless you have personal guarantees, or your customer's debts are secured against a property, you are an unsecured creditor. As such, you share money left after secured and preferential creditors have been paid.

• Secured creditors include banks and organisations owed loan repayments.
• Employees are the main preferential creditors.
• Should any money remain, unsecured creditors are paid in proportion to the amount of money owed to them.
• How much you receive will depend on how much money is realised by liquidation as well as the total number of claims and how much each is owed.
• If a customer has few assets, you may not receive anything at all.