Home Expert Opinion Four steps to recover a debt without going to court

Four steps to recover a debt without going to court

If a business or individual owes your business and defaults in repayment of it, there are a number of steps you may be able to take to recover it.

1. Send a letter of demand

A letter of demand is a letter from the lender to the borrower requesting that the debt be repaid by a certain date.

A letter of demand serves two purposes. Firstly, it gives the borrower a final opportunity to repay the debt. Secondly, if the lender eventually commences legal proceedings then the lender can show the court that it took reasonable and appropriate steps to attempt to recover the debt from the borrower.

A letter of demand should:

  • be addressed to the borrower;
  • dated;
  • provide details of the debt and lender;
  • specify the repayment date;
  • inform the borrower that if they don’t repay the debt by the repayment date specified in the letter of demand then the lender will commence legal proceedings to recover the debt without further notice to the borrower, but only if the lender is prepared to commence legal proceedings. If the lender is not prepared to commence legal proceedings then informing the borrower that legal proceedings will be commenced in the event of non-payment should be carefully considered.

2. Work with a solicitor or debt collection agency

Rather than the lender send a letter of demand, as in step 1, the next step is for a solicitor or debt collection agency to send a letter of demand on behalf of the lender. Solicitors charge legal fees for their services and debt collection agencies generally charge either a percentage of the amount recovered or fees for their services.

For debts owed by companies, as opposed to individuals, if the company does not respond to a letter of demand then for debts above $2,000 the lender (or its solicitor) may issue a statutory demand, which gives the lender grounds to have the borrower wound up and a liquidator appointed if the borrower does not comply with the demand or file a defence within 21 days.

3. Negotiate repayment of the debt

If the borrower responds to the letter of demand, they may request that the lender accept repayment of the debt by instalments.  If this occurs then the lender should seek repayment by instalments in the shortest time possible that is realistic having regard to the borrower’s circumstances, repayment history and amount of the debt.

Seeking to negotiate a mutually acceptable resolution is in the best interests of both the lender and the borrower as commencing legal proceedings is uncertain and can be time consuming and expensive.

4. Participate in ADR

Participate in alternative dispute resolution (ADR), which includes mediation, conciliation, arbitration and other dispute resolution schemes involving third parties that assist the parties in trying to resolve their dispute.

ADR can be undertaken either before or after legal proceedings are commenced and is an informal way of resolving disputes, including repayment of debt disputes, in a more timely and cost-effective way than legal proceedings.

To conclude

There are a number of steps a business can take to collect a debt which don’t involve going to court. It’s a great idea to take advantage of these, as legal action is expensive and unpredictable.

It is critical that you keep a record in relation to any advance of money made giving rise to the debt (such as a Loan Agreement), any repayments of the debt and attempted recovery of the debt.  This is not only good practice, but may be necessary if recovery is required through the court.

About the Author

Lachlan McKnight is the CEO of www.legalvision.com.au, which provides online legal services, including customised legal document and fixed-fee online lawyers.

Lachlan McKnight
Lachlan McKnight is the CEO of LegalVision www.legalvision.com.au. His goal is to disrupt the legal services industry by providing online, cost-effective and high quality legal advice to small and medium business.