Debt Collection FAQs – Part 1
When should I refer a debt to a debt collection agency?
The answer to this question depends on your own internal credit management procedures.
It is well known within the business that the older a debt becomes the harder it is to collect. So sooner rather than later is suggested. We believe a debt should be referred to a collection agency as soon as you feel the debtor is not responding positively to your internal collection efforts.
Look for these tell-tale signs that you have a recalcitrant debtor:
- The debtor has failed to honour, two or more promises to pay.
- Three or more contacts with the debtor have failed to secure payment. This contact may be a combination of phone calls, demand letters, emails or text messages.
- The debt is more than 60 days overdue for payment, and the debtor continues to ignore your requests to pay.
Referring the debt to a debt collection agency in any of the above scenarios will allow you to focus your internal resources on the recovery of debt that is less than 60 days overdue. It is better to let the experts deal with any debt over 60 days plus overdue, thereby maximising cash flow and minimising costs.
How long does it usually take to collect a debt?
How long is a piece of string? There are a variety of reasons as to why a debt is overdue and how long it will take to recover the debt. These include:
- Cash flow and overall financial position of the debtor
- The debtors’ willingness to pay
- Is the debt in dispute, and if so, what is the complexity of the dispute?
- The quality of your credit applications, agreements and guarantees
- Insolvency
However, when you refer a debt to a collection agency in a timely manner the debtor realises that they have pushed their luck as far as they can and that you are now serious about a quick recovery. Referring the debt to a debt collection agency will reduce recovery timeframes, enhance recovery prospects and reduce the potential of the debt becoming a write-off.
Can I recover my costs for debt collection or legal fees?
This depends on whether indemnity clauses in your agreements provide you with rights to recover debt collection costs. In most states and territories of Australia, you are able to recover your collection costs from your customer. However, the commission that is paid only upon successful recovery is not considered to be a liquidated debt until your debt collection agency has billed you for their services. Those costs have not crystalised as a recoverable debt until you have been invoiced.
You, therefore, need to make sure that your costs indemnity clauses are drafted in a way so as to ensure that they will fully withstand any legal challenge. NSW Credit Law can assist you with drafting credit applications, agreements and guarantees.
Legislation in certain states, such as Queensland, does not allow you to recover all your collection costs from your customer, even if there is a costs indemnity clause contained in your agreement.
Your debt collection agency will be able to advise you in advance as to whether or not costs are recoverable.
If legal proceedings are issued then the statutory schedule costs for debt recovery litigation are recoverable along with statutory interest and will be added to the principal debt amount of the statement of claim. If a matter is defended then the total amount of costs you can recover depends on the jurisdiction and the discretion of the court when it makes costs orders.
What will it cost me to refer a debt to a debt collection agency?
The cost will vary depending upon the size and nature of the debt, the age of the debt and if a dispute exists. A reputable debt collection agency will explain the costs that may be incurred before you refer the debt, so you are able to make an informed decision as to the commerciality of debt recovery action.
Usually, a debt collection agency will charge a commission for their services, however, this is only payable upon the successful recovery of the debt or part thereof.
If legal action is required, then there will be additional costs involved. Here again, your collection agency will be able to explain the process, costs and timeframes involved so that you are fully informed before you decide to proceed. Legal action should never be commenced without your prior approval.
If the matter requires legal action, will I still pay commission on funds collected?
With most debt collection agencies, the answer to this question is yes. However, at NSW CAPI Agents and NSW Credit Law, the answer is NO.
We only charge a commission if the debt is recovered by our pre-legal collection agents without the need for legal action. If the debt requires legal debt recovery action, then you will pay the legal costs, the majority of which can be recovered from the debtor, but you will not be liable for any commission payment upon successful recovery.
We consider the commission payment to be the fair price that you should pay for a debt being recovered without the need for legal action. If a debt cannot be recovered without the need for legal action, then it is our view that the commission payment is not payable by our clients.