Debt recovery is a multi-stage process that involves subtle to more forceful actions. A letter of demand is an act of last resort in the debt recovery process. It becomes necessary when your repeated attempts to recover unpaid debts have failed. You use a letter of demand only when you have exhausted all steps in your debt recovery efforts and the timeline for payment of the debt has passed. A letter of demand is the more forceful push after still getting no payments following two softer reminders, in writing, sent to the debtor company. A letter of demand is significant in the debt recovery process because it is often the final reminder before taking legal action.
Timing is Everything
There are two initial issues to consider before you can create effective demand letter:
1. The Dispute
Is there a dispute? You need to ask yourself first this question before sending that demand letter. Remember that the demand letter is the last resort. You should act with prudence when it comes to sending a demand letter because your goal here is not only to recover an unpaid debt but also to maintain good relations with your customers. Make sure there is something to demand before drafting the demand letter. How do you do this? Ask the following questions:
- Do you have a contract?
- Is the contract written or verbal?
- What are the terms contained in the contract?
- Is the other company or person in breach of this contract?
- Does the contract include a clause on how to resolve when a dispute arises?
2. Time When to Send Letter
Timing is everything when sending out a demand letter. The demand letter must be sent only when you have sent an initial and a final payment reminder. The initial and final payment reminders are two separate payment reminders, preferably in writing and preferably also in the form of a letter. A demand letter is an act of last resort because the two payment reminder letters should be your first acts in recovering unpaid invoices.
Rights Word Lead to Effective Recovery
A letterhead is important to include in your demand letter because a letterhead signifies formality and legitimacy. The company you are collecting the debt from will have many suppliers and may not be able to immediately recognize you without a letterhead. Or, in a worst-case scenario, the company may think you are a scam company. Your letterhead can include your company logo but it need not be fancy. What is important to be included in your letterhead is your company name and your contact info: mailing address, telephone and/or facsimile numbers, and email address.
Go direct to the point – which is to demand payment for a debt – and outline the rest of the facts in chronological order. Remind the debtor company that payment reminders were made and indicate the dates the reminders were sent. The demand letter should also answer the 5 Ws and 1H questions.
- How much is owed?
- What is the debt for?
- Who is claiming the debt?
- When is the payment due?
- Where should the payment be made?
3. Legal Basis.
This is where you will write your dispute. State that under the terms and conditions of your contract, you are now entitled to make a formal demand following repeated requests for payment. In this portion, you can include a request for late payment interest if and only if your written contract contains a late payment interest clause.
Use simple and clear language. While you may be frustrated for not getting paid on time, this is not the time to let your frustration translate into your written correspondence. Do not use accusatory language in your demand letter. Remain formal and cordial because your goal here is not just to recover the amount unpaid but also to maintain good business relations.
Make copies of letters and responses received. Attach these copies in your letter as an annex and arrange them in chronological order so that it will be easy for the debtor company to refer to the documents.
6. Mailing Option.
Choose mailing option that requires a recipient to sign for the document. Your demand letter must be received by someone so that it will be easy for you to identify the person when there will be future conflicts arising from such a letter of demand.
Consider the Ethics
A letter of demand is a formal notice to your debtor. It is one of the most effective ways of recovering unpaid debts. But it also has consequences that may put you in a far worse situation. A demand letter can inflame a dispute, and, when crafted badly, can damage business relationships. Moreover, the process of serving a demand letter is subject to ethical considerations. The Trade Practice Act of 1974 specifically prohibits the use of physical force, undue harassment or coercion in connection with the payment for goods and services.
A letter of demand is not your ordinary letter. It is a written document that you can use as an effective tool in your debt recovery system, but it can also put you in danger if not used or served properly. Because of its value, it is always best to consult with professionals when drafting one or when proceeding to serve one to your debtor. When in doubt, consult an insolvency law firm to create effective demand letter.