The short answer is YES! (Debt Collection Running To Court) – The collection of debt does not necessarily mean that you have to go all the way to Court, and more importantly, there is more to debt collection than only collecting the debt when it is outstanding.
Let us start with methods of collecting other than by issuing summons.
It is possible to attempt collection by means of soft collection only. Soft collection is a broad term used to describe the non-litigious processes used to collect debt. The methods used are usually limited to sending a letter of demand and negotiating with the debtor to make payment, whether it be in full or in instalments. At this stage, if the debtor is not at all inclined to make payment, for any given reason, the creditor may elect to issue a summons for the recovery of the debt. In our experience, many debtors need only the demand of an attorney to urge them to make payment of an outstanding account.
When the soft collection process does not work, it usually is due to one of the following reasons,
- Your debtor has a genuine complaint regarding the goods or services received
- They do not have the funds to make payment.
If the debtor has a complaint, this is usually a matter best deliberated by Court. This means that a summons must be issued, and the Court must decide whether the money is indeed owing to the creditor. If the debtor however has no money, the options within the soft collection phase are to either allow payment in instalments or to write the debt off. Should instalments be offered, our advice will always be to accept such offer, as the failure to accept many times lead to no payment being received at all. The benefits of attending to outstanding debts in the above manner is that it is both time and cost effective.
How does one prevent even getting to the point of collection of bad debt?
This may very well be the future of debt collection. One needs to start rethinking the strategies used to date, especially in light of the long duration and costs associated with collecting debt in the conventional sense. It is however necessary to put some thought, time and money into ensuring that the internal operations of your company are in line to prevent a bad debtor situation.
There are various methods of minimizing the risk of accounts remaining unpaid, these can be divided into four broad categories,
- Debtor management.
1. Contracts: Contracts are the foundation of the relationship between you and your client. If your paperwork is in place and in order, you are already minimizing the chance of a debtor not making payment in the ordinary course. It is necessary to formalize the relationship in order that both parties understand exactly what is expected of them and when. When it is unclear to the client what he is purchasing and the item delivered differs from expectation, it follows that such client would not be forthcoming with payment. This is a simple example of how a thorough contract could prevent misunderstanding and ultimately a dispute.
It is therefore of utmost importance to ensure that your contract is well drafted by a legal professional and reviewed at least bi-annually or upon major changes to your business model or product.
2. Training: Equally as important as the contract, is ensuring that the employees using that contract in their day to day dealings know exactly what each and every clause therein means. This seems obvious, but sales representatives are not legally trained, nor do they normally know the importance or impact of each clause. Emphasis should be placed on ensuring that each new sales representative is trained on the content of the contract to ensure that the signing on of new clients are done without fault.
3. Vetting: Vetting in broad terms means investigating the new client that was signed up to ensure that the client is who they say on the contract and information, such as trading status, is confirmed. A vetting checklist should be available to whomever is responsible for vetting to ensure that the process is run time effectively and consistently each time. This is a critical step in ensuring that the new client signed up, is not likely to default on payment. If at this stage, steps are skipped, or the stage is neglected in entirety, the debtor is far more likely to become a bad debtor and a problem at a later stage. It is therefore imperative that vetting is done and done in accordance with a well-established procedure.
4. Debtor Management: Debtor management is likely the most important function to ensure that debtors keep to payment terms and debts do not become overdue. This procedure should be drafted and established in order that the employee responsible for attending to the work knows exactly what must be done and when. This process will include details such as dates on which invoicing is done, dates of follow-up, manner of follow-up, reaction to non-payment and the like. The accounting professional would usually usurp the role of debtor clerk, however there should be specific training for this individual before adding the duties to ensure that it is correctly and efficiently completed. If your debtor clerk is 100% effective, your bad debt should be minimized to a very large extent.
If you would like more information on the above manners in which to manage bad debt or would like to discuss the products and services that our offices offer in this regard, please feel free to schedule a consultation or request more information electronically.