Finance

The commercial debt recovery process step-by-step: How to get your money back

Allison S Robinson | 3 September 2021 | 3 years ago

The commercial debt recovery process step by step

Commercial debt is a type of business debt that arises when an individual or company owes money to another. Commercial debt can be owed by businesses, individuals, and government organizations. It may arise from loans, credit cards, unpaid invoices or even debts arising from court judgments. Creditors have several options for recovering their money if the debtor does not pay them back on time including legal action and through the use of commercial recovery agencies.

Getting the money back can be a long and arduous process, but with the right actions taken, it is possible to recover a debt from even the most unwilling debtor. Here is everything there is to know about commercial debt recovery.

What is commercial debt?

Commercial debt is a type of business debt that arises when an individual or company owes money to another. Commercial debt can be owed by businesses, individuals, and government organizations. It may arise from loans, credit cards, unpaid invoices or even debts arising from court judgments.

The most common sources of commercial debt are:

Loans – The creditor lends the debtor some amount of money for free on certain conditions such as interest rate and repayment period which they must agree to before receiving it

Credit Cards – The borrower pays in advance with their own card where the bank will make repayments automatically once the payments have been made each month

Unpaid Invoices – These occur when one party has provided goods/services but not received the payment.

Debts arising from Court Judgments – These arise when a company has been taken to court and the judge rules that they must pay an amount of money, for example as compensation

The debtor may not be aware that there is commercial debt owed until it’s too late so creditors will often check credit reports to see if there are any accounts which have gone into arrears and try to contact the debtor before time runs out. The creditor can also send reminders with final deadlines for paying back the money, offer more favourable repayment terms, or even take legal action against the debtor in order to recover what is due.

What are some common reasons businesses get into debt?

There are many reasons why businesses end up in debt. Some of the most common ones include:

  • Borrowing too much money for start-up costs – This may cause the business to have repayment expenses which are higher than its revenue.
  • Poor financial forecasting – Businesses often don’t plan for unexpected circumstances such as extra staff or a rise in utility prices. These create increased expenditure and operational costs which can pile up and lead to debt.
  • Lack of cash flow management – This is when funds coming into the company from customers are much lower than what is needed to pay outgoing costs like salaries and rent.
  • Poor management and operational decisions – This may involve simply bad operational decisions or senior executives conducting fraudulent activities like embezzlement or outright theft.
  • Legal problems – These can include fines, or legal disputes over intellectual property.
  • Financial difficulties from downturns in the economy– This may be a result of slowdowns in consumer demand for goods and services which lead to decreased sales leading the company into debt.
  • Unexpected natural disasters – These can disrupt trade routes or manufacturing operations which can hurt business’s bottom lines.

What are creditors’ options for recovering their money?

Recovering money can often be very difficult. Debtors may not even realise they owe the money at that moment, or may be recalcitrant about paying it back. Some debtors bury their heads in the sand and leave addressing the money they owe until the last possible moment.

Here are some of the recovery options available to creditors:

Speak to the debtor personally

The first step for creditors is to speak with the debtor personally. They should inform the debtor that commercial debt recovery proceedings have begun and explain their options for paying back what they owe. This may mean either making a payment or selling any assets in order to settle up the debt.

Send a written reminder

If this conversation is not possible or ends up being fruitless, creditors can then send a written reminder for the unpaid debt. This should be sent after two weeks of no payment, and include details about what has happened to date in addition to timelines related to future events such as court action. It is very important that creditors keep a record of all correspondence sent to use in future proceedings.

Send a final warning letter

This type of correspondence is officially known as a Letter Before Action (LBA). They are often sent out in order to remind the non-paying company that it is past due on its obligation. They can also be used as a way for creditors to gauge how serious of an issue this debt has become before they decide if legal action needs to be taken.

The LBA should include:

a) the date.

b) the name and title or position the sender has with the creditor.

c) confirmation of the amount of money the creditor is demanding.

d) whether the creditor wants the money paid back by cheque or bank transfer.

e) the debtors contact information, including their address and email address if they have one.

Seek a County Court Judgement

A creditor may then start proceedings by going to court and seeking a County Court Judgement. This is the quickest way for creditors to recover their money, although it can cost a lot of money to go through the process.

Once a CCJ has been granted, the creditor then has the option of various types of enforcement, including:

  • Charging order – This is the most common way for a creditor to recover their money. The order is made against the company’s property, including shares or assets and can be enforced by law if necessary.
  • Controlled goods agreement – This is when the debtor agrees to grant legal control of certain goods (called “controlled goods”) to the creditor for an agreed time period. If during this agreed time period the debtor defaults on their repayments, they will then lose ownership rights of these controlled goods which are assigned by way of sale to the creditor at market value. The proceeds will then be paid out towards reducing what is owed by the debtor.
  • Winding up order – This is where the court is asked to appoint a liquidator. The Liquidator can then start recovering any assets that are still owned by the company and use them for as much money as possible in order to pay back what has been owed.

What is a commercial debt recovery agency?

A commercial debt recovery agency is a company that will help to recover money owed to them. They are often called upon when the debtor has not paid back their debts after repeated attempts from creditors, and there’s concern about whether or not they can afford it, or when legal action needs to be taken.

Commercial debt recovery agencies in England have two main types of service:

  1. Debt Collection Agency – A debt collection agency takes payments on behalf of another party (the creditor) by various means like cheque or bank transfer.
  2. Debtor-Creditor Agent – This type of agent does not take any payment themselves but work with both parties involved to find an agreement that satisfies everyone. The agreements made between these agents need to comply with the law.

How does the debt recovery agency get the money back?

  • The agency will first undertake a thorough investigation of the debtor’s financial situation.
  • Once this is complete, they will produce an agreed plan for how to recover what is owed based on their findings. This agreement may differ depending on where in the UK the debtor is located.
  • If no agreement is reached, or if the debtor does not stick to their proposed repayment schedule as laid out in the agreement, the agency will then take legal steps on behalf of the creditors. These actions could include charging orders, controlled goods agreements and winding up orders (as explained above).

What laws and regulations govern commercial debt recovery in the UK?

The law in England and Wales on commercial debt recovery is based around the Limitation Act of 1980. This Act sets out a number of rules that creditors must follow to start legal proceedings against their debtor, including:

  • Giving notice in writing
  • Doing this within six years from when they are owed money by the debtor.
  • Not using violence or threatening behaviour.
  • Not trespassing on any property belonging to the debtor and not taking away controlled goods without permission from a court order.
These guidelines also apply to debt recovery agencies representing the creditor. If they aren’t followed then it may mean that the creditor is penalised by only being permitted to recover what has been lost through civil penalties as opposed to being able to take further legal action.

There are also other regulations and guidance in the UK on commercial debt recovery that creditors must follow. These include:

  • The Data Protection Act – This stops personal information being shared with third parties without permission, unless it is necessary for law enforcement purposes or to protect someone’s life.
  • Data Protection Principles – There are eight principles which govern how data should be collected, stored, used etc., including keeping any records as accurate and up-to-date as possible at all times.
  • Consumer Credit Act 1974 – It sets out the rules about credit agreements, including when they can be made and what the terms must be. For example, a creditor cannot make an agreement with someone who has been declared bankrupt.

What are the potential penalties for not paying back commercial debt?

In England and Wales, the main penalty for not paying back commercial debt is a civil order. These are different to criminal court orders which can have harsher punishments like prison time or fines (depending on the severity of the issue).

If no agreement has been reached with their creditors, either party may apply to the courts for an attachment of earnings order. This is where payments from any wages that come into a debtor’s account will be set aside towards reducing what they owe until it is satisfied in full. If unpaid then this could lead to the debtor being sent to jail after two months if there has been more than one previous request made by creditor(s) who haven’t received payment within these given periods.

The other possible punishment for those refusing to pay back commercial debt is a winding up order. This could lead to the debtor’s company being put into liquidation which would result in all their property and assets becoming owned by whoever initiated this legal process.

Are companies able to write off any commercial debt in the UK?

The short answer is yes, but only if they meet certain criteria.

One example of a company being able to write off commercial debt in the UK is where they are going into liquidation and there aren’t any funds available for paying back what has been borrowed from their creditors. In this situation, the bankruptcy order will allow them to write off up to £15,000 worth of liabilities owed against a creditor at any one time.

Another way that companies may be able to get out of an agreement with creditors would be through insolvency proceedings; these happen when all parties involved agree amongst themselves as well as with HMRC on how much money needs to be paid back over a period of time.

This agreement is then drawn up and signed by all parties, including the debtor’s main creditors. It is then registered with HMRC who will enforce it as if they were any other creditor in that situation.

To sum up

Commercial debt recovery can be very difficult if the debtor is unable or unwilling to pay back the money. The important thing for creditors is that they follow the correct procedures to ensure the best chance of receiving the money they are owed. If the debtor continues to avoid or refuse repayment a debt recovery agency may be able to help add extra pressure, but creditors must make sure both they and the agency adhere to all debt recovery regulations or it could hurt their claim.

Topic

Finance

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