Recovering Bad Debts
No matter how good your credit control procedures are at limiting the risk of bad debts, some debtors will inevitably fail to pay. When this happens, you must choose your course of action to recover the debt.
Taking legal action should always be viewed as a last resort and only undertaken when you have exhausted all other options and the debtor still doesn’t pay. Legal action will destroy any business relationship with the client so only do this if you’re sure you don’t want to work for them again.
Taking the Correct Action
The action you take needs to be proportionate to the size of the debt. If it’s only for a small amount, the most cost-effective response may be to write of the debt and move on. Larger amounts might warrant a letter from your solicitor threatening court action, although this may have limited effect on stubborn debtors.
Ultimately, court action may be inevitable and the form of this action may depend on the size of the debt. When it is no more than £5,000, action is generally through the Small Claims Track of the County Court. The process is relatively simple:
- Complete claim form N1 (downloadable from https://hmctsformfinder.justice.gov.uk/HMCTS/GetForm.do?court_forms_id=338).
- Send it to the County Court Money Claims Centre with the appropriate court fee (ranging from £25 for a maximum £300 debt up to £185 for £5,000 and higher amounts for claims above that).
- Mediation will be encouraged as a quicker and cheaper alternative to court action.
- If mediation isn’t followed or has no effect and the debtor doesn’t settle the claim, the case will go to trial, which will typically last 2-3 hours.
- If judgment is in your favour, the debtor will be ordered to pay, within a set time, the amount claimed plus interest and your legal costs.
Claims for larger amounts or that are of a more technical nature may go through the Fast Track or Multi-Track of the County Court. Each will have a similar outcome and, if the debtor still fails to pay, you can apply for enforcement such as a Warrant of Execution (where bailiffs seize goods to sell), a Third Party Debt Order (where the client’s debtors pay you directly) or a Charging Order that places a charge on the debtor’s assets.
Be Sure of Your Case
All this takes time and can incur further costs, so the outcome is not certain. You also face the possibility of a counter-claim from the client, who may say that non-payment is due to supplied goods or services being defective and causing harm to their business. Thos may result in you paying damages and costs rather than receiving money owed, so you need to be sure of your grounds.
To be safe, it’s maybe worth seeking the advice of your solicitor before starting the claim. This will add to the cost but may increase your chance of success.
Using Phoenix Cloud Accounting will make it easier to keep track of what you’re owed and ensure bad debts are less likely.