How to Recover Unpaid Debts? From Demand Letter to Legal Action

Cash is important to a business of any size. Businesses need to collect whatever creditors owe them to maintain positive cash flow and continue to operate. If you are a small to medium business, you have three options to recover unpaid debts:

  1. Use your in-house invoice and payment reminder system,
  2. Hire a debt collection agency, or
  3. Pursue legal action.

Use In-House Invoice System

Using the in-house invoice and payment reminder system is the most cost-efficient way to recover unpaid debts. You, your accountant, or your bookkeeper can do this, using tools that are already available in your company, at no additional cost to you. This process will involve sending an invoice and payment reminder to the debtor company and calling its accounts department or its owner. It may also involve creating a payment plan if the debtor company is unable to pay its debts in full.

While this is the cheapest option, some companies do not find this the most effective as most invoices still return unpaid. You or your accountant will also have no way of knowing the financial situation of the debtor company. There are lots of reasons why a certain company is facing hardship and thus cannot pay debts when due.

Hire Debt Collection Agency

When the first option is not effective, the second way to recover unpaid debt is to hire the services of a debt collection agency. The government subjects the debt collection industry to strict compliance laws. Debt collection agencies are professionals who are trained not just to recover debts but to recover those debts through legal and ethical means.

The debt collection agency has the professional training to investigate your debtor’s financial situation. These professionals also analyze why the debtor is unable to pay its debts to you when they are due. This knowledge helps the debt collection agency to craft a more effective payment plan. After investigation, the debt collection agency will send the letter requesting the payment. When this is unheeded, the debt collection agency will send a formal letter of demand to the debtor company. The letter of demand is important because it can be a cause of action when there is no other better way to recover a due debt other than through a court proceeding.

How to Recover Unpaid Debts? From Demand Letter to Legal Action

Pursue Legal Action

Legal action can start with the letter of demand and is one way to recover unpaid debt. The demand letter is very important before commencing the legal action because, without it, no legal action will prosper. Legal actions are handled by lawyers and should be handled by lawyers. A lawsuit will be filed to demand for payment of money claims. The lawsuit should notify the debtor company. If the judge rules that the debtor should pay but the debtor fails to do so, the creditor can force the debtor company into bankruptcy or liquidation.

Lawsuits and bankruptcy or liquidation is the most expensive option for businesses, especially small businesses. A legal action can guarantee recovery, although not a full recovery as the company may have other creditors who have superior priority than you (e.g. banks).

Whatever Option You Choose, Seek Professional Advice

All three options have their benefits — and their disadvantages — especially in terms of cost and the effectiveness. As a business, you can use all three options. But before proceeding, it is best to go through each option with the help of a professional who has both legal and financial knowledge. A professional can also help you properly weigh your options for an improved debt recovery system.

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