Instigating legal action against a defaulting debtor is not something any business wants to have to contemplate. The good news is that there's a 'halfway house' between standard payment chasing processes, such as statements, reminder letters and phone calls, and resorting to the full force of the law.
This involves sending a solicitor's letter, sometimes also known as a 'letter before action' or 'letter of claim'. Stating your intention to take things to the next level if the debt is not settled within a specified timeframe, this formal document is often enough to persuade a non-payer to settle their debt right away. If they pay the outstanding debt before the deadline, they can avoid being involved in court proceedings, which could seriously damage their reputation and their credit rating.
There's also another advantage to sending a letter before action. If the customer is a an individual or a sole trader, wording the letter in the right way and including certain specified information, such as the debt total and how it can be paid, can ensure you comply with the litigation Pre-Action Protocol for debt claims. This describes the conduct the court will normally expect of a creditor prior to the start of proceedings.
What next?
If the debtor fails to take notice of the solicitor's letter and the debt still remains unpaid, the first decision to make is whether it's wise to take further action. The outstanding debt may be relatively small or the chance of ultimately recovering the debt may be remote. Therefore, the time, effort and potential cost involved in taking the legal route may not be worth it and it may simply be more prudent to write the debt off. It's also important to consider the impact taking legal action will have on your commercial relationship with the client. However, you may choose to take legal action to set a precedent.
If you do decide on escalation, there are two main options available to you:
Court action
The type of court action you take will depend on several factors, for example whether the debt is a commercial or personal one, the amount owed etc. The aim will be to achieve a County Court Judgment (CCJ), which means that the court has formally decided that you're entitled to the money owed by the debtor.
Insolvency
If the debt is undisputed, it may be more appropriate to take this route. For a commercial debt of over £750, you can petition the court for a winding-up order. For individuals, if the debt is more than £5,000, you can present a bankruptcy petition to the court, and the debtor's assets can be taken and sold to pay the debt.
Of course, it may not be necessary to actually present the petition. Sometimes, the threat of insolvency or bankruptcy is enough to make the debtor pay immediately.
