Debt recovery settlements primarily occur when a debtor finds themselves unable to pay back a debt straightaway or in its entirety. The parties re-negotiate the debt in a way that is more realistic for the debtor. In this article, we set out key considerations for both creditors and debtors when there is an outstanding debt and parties are negotiating a settlement for a debt recovery matter.
Letter of Demand
The best place to start when a debtor has not paid a debt and does not respond to friendly overdue reminders is a letter of demand. A letter of demand is a notice:
- outlining the amount the debtor owes;
- demanding payment by a certain date; and
- outlining the steps that will be taken if the debt is not paid.
Quite often, a well-worded letter of demand is enough to persuade a debtor to pay. Even if they are unable to pay the debt by the demanded date, the letter may open up communication channels and allow the parties to negotiate a settlement.
For most debts, a creditor must commence recovery action within six years of:
- incurring the debt;
- the date of the last debt payment; or
- the last time the debt was acknowledged in writing.
The six-year period begins on whichever one of these occurs last. It is important to check the Limitation Act 1969 (NSW) or other relevant legislation to ensure that the debt is not too old to be recovered.
Gather the Evidence
Before beginning any negotiations for a settlement for a debt recovery matter, parties should gather all the evidence about the matter available including the:
- initial agreement or contract;
- correspondence between the parties; and
- outstanding invoices.
Consider the Other Party’s Interests
For negotiations for settlement for a debt recovery matter to be successful, it is a good idea to keep in mind the other party’s interests. This will allow you to reach a conclusion that will further the overall position of both parties. The debtor’s interest is generally to pay as little of the debt as possible, as late as possible. On the other hand, the creditor’s interest is to receive the largest amount possible, as soon as possible.
Often, debtors are not paying a debt because they are facing financial difficulty. There is a real danger that a creditor could end up with nothing if a debtor goes bankrupt. A good reminder is that some money in the hand (even if it is less than the total debt amount) is better than none at all.
Negotiate the Terms
Taking into consideration each party’s interests and financial position, negotiate terms that will best further both parties’ overall position. Keep in mind that the alternative may be lengthy and costly legal proceedings. Consider whether allowing the debtor to pay only part of the debt but at an earlier time is a better alternative.
For example, say David owes Charles $10,000 for a car. When David originally bought the car, they negotiated a monthly payment plan where David would pay back the car over three years with interest. They are one year into the contract, and David continuously defaults on payments because he is experiencing financial hardship. David and Charles negotiate an agreement where David pays $6,000 now and no longer owes Charles anything.
The earlier repayment of a lump sum is beneficial for Charles because it guarantees that he will receive at least some of the debt and he receives the money immediately. It is also beneficial for David because he does not have to pay back the full amount he originally owed. David and Charles have reached an agreement by trading off the time of repayment with the amount of money paid.
Put it in Writing
Finally, when you have negotiated appropriate terms and come to an agreement, you should ensure this agreement is in writing. The agreement should include:
- the amount;
- the deadline for payment; and
- what will happen if the debtor fails to pay in accordance with the terms of the agreement.
You can seek advice from a debt collection lawyer or agency to help you reach a settlement and draft an agreement that will be enforceable.
Settlement for a debt recovery matter is a way for parties to reach an agreement and avoid drawn-out court proceedings. When negotiating, parties should come to an agreement that balances the competing interests of both parties. This could involve a reduced sum being paid on the spot or re-negotiating a realistic payment plan. If you need assistance negotiating a settlement for a debt recovery matter, contact LegalVision’s debt recovery lawyers on 1300 544 755 or fill out the form on this page.
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