In businesses where products or services are offered on credit, effectively managing debtors is essential for the optimal running of the business to ensure working capital cycles do not lengthen over time, thereby placing undue cash flow strain onto the business. Effective debtor management is achieved by identifying slow-paying and non-paying debtors, and consistently applying the same disciplines in your relationship to manage those customers.
- Employing a “softer collection” approach is more favourable for slow-paying customers. Rather than pursuing a costly formal litigation procedure, this approach is designed to determine a reasonable payment plan that benefits both parties.
- It is not recommended to pursue a formal legal process where there are slow- or non-paying debtors that your organisation wishes to maintain a relationship with, as doing so tends to place a strain on the professional relationship. Instead, endeavour to negotiate a written agreement with these debtors.
- For continuously non-compliant debtors, a soft-collection process is not advisable, as the debtor is likely to not uphold the repayment plan terms. In this circumstance, taking action against the non-compliant debtor through a formal litigation process is encouraged.
The formal debt collection procedure begins with a Letter of Demand, which requests payment from the debtor within a reasonable time period (usually between 7 and 10 business days). Should the debtor fail to respond to this request, a Summons will be issued at court. This Summons is a formal request for payment that includes the terms of the lawsuit against the debtor.
The service of this Summons must be affected by the Sheriff of the Court. Depending on how quickly the debtor is located, this procedure can take up to one month. After the Summons has been served, the debtor has ten business days to submit a notice of intent to defend the action. Failure to do so will result in an undefended action, allowing the plaintiff to apply for a Judgement by Default.
This application may then be considered in open court. The complexity of the claim will determine whether it is heard through verbal arguments or sight of the documents alone. The court can take up to two months to issue a Default Judgment.
When granted, the Default Judgment presents the plaintiff with a few solutions, such as the ability to place a Warrant of Execution against the debtor’s movable property.
Should no payment arrangements be made, the Sheriff of the court will be instructed to serve the debtor with a Warrant of Execution and draw up an inventory list of movable property. This Warrant of Execution remains intact for four months and details that any disposal of movable property in this time frame will be considered a criminal offence.
If the debtor fails to make adequate payment arrangements after attaching their assets, the plaintiff can instruct the Sheriff to store and sell the attached belongings at a public auction. Money raised from this auction is then allocated towards the debt owed.
Whether undefended or otherwise, a formal litigation process could be time-consuming and should always be analysed against the potential return and impact on the relationship with the customer concerned.
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