Should You Go to Court to Recover a Debt?

In Short

• Before suing to recover a debt, check whether the debtor can actually pay and whether you have strong evidence to support your claim.

• Consider the costs and time involved in litigation. Pursuing court action can be expensive and slow.

• Try negotiation or settlement before starting legal proceedings. This can save money and preserve business relationships.

Tips for Businesses

Keep clear records of invoices, communications and attempts to recover payment before considering court action. Always assess the debtor’s financial position and the strength of your evidence. Explore alternative options like negotiation or mediation first, and weigh the likely legal costs against the value of the debt before initiating litigation.

Summary

This article is a practical guide for Australian business owners on the debt recovery process when litigation is being considered. It explains key factors to consider before going to court, prepared by LegalVision, a commercial law firm that specialises in advising clients on debt recovery and dispute resolution.

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Table of Contents

• Consider Whether Your Debtor Can Pay
• Determine if You Can Prove Your Claim
• Calculate Your Likely Costs
• Anticipate Being Out of Pocket
• Negotiate a Commercial Settlement
• Key Takeaways
• Frequently Asked Questions

Going to court to recover a debt is intimidating, expensive and time-consuming. Therefore, you should think carefully before embarking on this final stage of the debt recovery process, especially if you have not exhausted your alternative options for getting paid. This article outlines what you should consider before filing your statement of claim.

Consider Whether Your Debtor Can Pay

Even if you have a strong claim, if your debtor has no means to pay, you may get little from starting a lawsuit. Therefore, before commencing court proceedings, find out what you can about your debtor’s finances.

Determine if You Can Prove Your Claim

Every good lawyer will tell you that ‘litigation is never a sure thing’. The more evidence you have to support your claim, the stronger your position will be. While evidence in the form of written documents is always best, it is not essential.

Calculate Your Likely Costs

The legal fees you can expect to pay can quickly exceed a small debt. The costs of pursuing a $2,000 debt can be the same as pursuing a $15,000 debt simply because the same steps need to be undertaken, like preparing your evidence and attending a hearing. In addition to your lawyer’s fees, you should also expect to incur additional costs, including:

• the court filing fee; and
• process server fees.

Process server fees are the costs of paying someone to serve documents on the other party. This involves giving them documents such as your statement of claim, either in person, by mail or by email. Litigation can be time-consuming. The time spent pursuing your debtor is time that you could otherwise spend on your business.

Anticipate Being Out of Pocket

If the court finds in your favour, your debtor will generally be ordered to pay your legal costs. However, you will not be able to recover all your costs. For claims under $20,000, and all undefended debt recovery proceedings (i.e. if the debtor does not show up to court), the legal costs you may recover are capped and calculated to scale.

Therefore, while you may recover more costs for larger claims, you should anticipate being ‘out of pocket’ for legal costs to some extent. We typically advise clients that they can expect to receive about 70-80% back of their total legal spend.

Negotiate a Commercial Settlement

In some circumstances, negotiating a commercial settlement will be the best-case scenario. You may agree to reduce the total amount of the debt in return for the debtor paying it immediately. Alternatively, you may choose to accept payment of the outstanding debt by periodic instalments. A commercial settlement provides certainty and avoids expensive and time-consuming court proceedings.

There is no ‘correct way’ to engage in settlement negotiations. Written correspondence, informal settlement negotiations or a more formal mediation are all possible options to consider as part of the debt recovery process. However, it is important to remember that all settlement negotiations should be undertaken on a without prejudice basis to protect your legal position.

Guide to Resolving Business Disputes

This guide provides key information on how to manage a business dispute as quickly and cost-effectively as possible.

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Key Takeaways

Going to court can be a valid action to recover a debt. However, before starting this final stage of the debt recovery process, consider whether it will be worth your while. Court proceedings are expensive and often you will be better off trying to negotiate a settlement.

LegalVision provides ongoing legal support for Australian businesses through our fixed-fee legal membership. Our experienced lawyers help businesses manage contracts, employment law, disputes, intellectual property and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 1300 544 755 or visit our membership page.

Frequently Asked Questions