16th June 2022
16th June 2022
A Debt refers to a sum of money that one party owes to another party, usually agreed and due under the terms of an agreement. Generally, debts can arise under two major circumstances namely:
In essence, a debt situation will always arise where money is owed to another party. Where this is the case, the party that is owed money will normally begin the Debt Recovery process. Debt Recovery occurs when a person or business (the Creditor) seeks payment from another person or business (the Debtor) who owes them an amount of money. In most situations, the parties will already be aware of the debt owed. However, in other instances, the Debtor can use an acknowledgement of debt letter to restate the debt amount so both parties are in agreement as to the amount that is actually owed.
Creditor: a person or business that lends money to another person or business with the intention that the money will be repaid in future.
Debtor: a person or business who owes money to another person or business. The Debtor is the person or business who borrows money from another person or business.
The reason for the debtor owing money can be any of the following:
The debt recovery process is one that can become tricky, especially when the debtor does not have the means to repay. This can particularly be the case where the creditor and debtor are private individuals, or where they are businesses that intend to continue with the commercial relationship. In either of these scenarios, there debt recovery process must be handled properly otherwise, any of the following events may occur:
Hence, a clear-cut debt recovery process is very important in ensuring that the relationship between the creditor and debtor remains cordial. The following tips can be used to ensure a smoother debt recovery process:
Where there is a written agreement between the Creditor and Debtor, it is always advisable for the agreement to have a clause that details what would occur where there is a debt, how the debt should be repaid and the options that will be available to the party that is owed money (the Creditor). The benefit of this is that the parties are aware of the process and why the process is being conducted the way it is. Thus for example, where a person buys services from a retailer and does not pay the fees after the services have been supplied, a written Supply of Services Agreement will normally have a comprehensive clause that outlines how the debt should be repaid and what will happen if the debt is not paid. In addition to making the debt recovery process smoother, such a comprehensive clause makes sure the parties do not leave anything open to their subjective interpretation which can be problematic.
This method is mostly found in commercial transactions as parties generally tend to enter written agreements for commercial purposes due to the high stakes involved. Such commercial transactions can be between two companies, a company and an individual or two individuals.
This method is applicable when there is no written agreement with a debt clause. For instance, where a friend gives money to another friend in the form of a personal loan. In such situations, it is common that there is no written agreement between the parties due to the personal relationship between the parties. Similarly, it is also possible that there is no written agreement where the debt is between a private individual (e.g. a regular customer) and a small business (e.g. a local convenience store). In such an instance, there is also unlikely to be a written agreement governing the relationship between the parties. Where this occurs, the relationship of the parties is likely to become fractured.
Such a situation can be remedied by the parties creating written terms to specifically deal with the debt situation. To create such written terms, the parties should negotiate terms on which the debt should be repaid and have the agreed debt repayment terms written down.
The written down debt repayment terms do not have to comply with a strict format. All that matters is for the terms to be clear and contain the parties' names, the amount of money owed and how repayment should happen.
Even when there are clear written terms as to the debt repayment, it is still possible for debt recovery to be troublesome. This is bound to happen where, for instance, the Debtor cannot afford to repay the Creditor due to any of the following reasons:
Where any of these occurs, recovering the debt can become difficult for the Creditor. To handle such a situation, the Creditor can implement some flexibility on the recovery of the debt. By utilising flexibility, the Creditor can ultimately get its money back even though it may take longer than originally anticipated. The following methods of flexibility will prove useful:
Bad Debt refers to a debt that cannot be repaid or recovered by the Creditor.
It is worth noting that for flexibility to work, the parties should negotiate in good faith and be honest about the process. An example of dealing in good faith and honesty is when the Creditor gives the Debtor a repayment schedule that is realistic and takes into consideration the Debtor's current financial state. This proves practical because if the repayment schedule is unrealistic, the parties will be back to square one with the Debtor unable to repay the loan and no progress on the debt recovery. Similarly, the Debtor should be transparent when agreeing to the terms of flexibility proposed.
Whenever a debt situation arises and there is difficulty in resolving it, people tend to look towards litigation as a means of recovering their debt. The belief is that going to court and receiving a court injunction ordering the Debtor to pay the sums owed. Instead of taking such a step, the parties should try alternative dispute resolution as a means of resolution. The UK in the Civil Procedure Rules 1.1 makes this part of the overriding objective as part of the measure to save the court cost and make sure each party is dealt with fairly. Methods of alternative dispute resolution that can be used include:
The benefit of using alternative dispute resolution as a means of debt recovery is that it is not as contentious as litigation and it is also cheaper. From a practical standpoint, the parties are able to remain cordial even after the alternative dispute resolution process. Additionally, the Debtor doesn't have to spend more on hiring a lawyer or court fees which will further complicate its ability to repay the loan to the Creditor.
It is not understated the technicalities involved in debt recovery. Everyone expects that they should be repaid when they give out money or provide goods/services. While this is true, this does not also mean that debt recovery has to ruin existing relationships whether they are commercial in nature or private/personal. As long as the parties can keep in mind that there is a relationship beyond the repayment of the money owed and that relationship is worth preserving, then they can take steps that can help them in settling the debt while not jeopardising their existing relationships. The methods and tips highlighted above can help parties achieve this. For these tips and methods to work effectively, the parties have to be transparent and honest with each other through the process of debt recovery.