Legal advice: dealing with bad debts

Posted on Mar 9th, 2009 | Personal finance

Bad Debt = No Dinner?

In this economic climate there are few letters which are worse to receive than a letter saying that your client has gone into administration or bankruptcy owing you money. But the number of these letters being sent out is on the increase. As a freelancer or contractor you will rank behind the banks, the Revenue and employees for payment and the prospect of getting money out of a company at this stage is remote at best. How then to stop your debts going bad?

Firstly make sure your terms of trade are clear and robust. Make sure they are clear as to how and when payment is to be made. Make sure it is stated what are the consequences of non payment and the steps you can take to enforce. Terms of trade need to be clear, reasonable and upfront – otherwise there can be real problems in seeking to rely on them come a dispute.

Make all invoices payable “on demand” or “presentation”. While you are free to offer your customers 30 days credit or more, that doesn’t mean you have to give this as of right. The effect of stating on your invoice for example that payment terms are 30 days or more means you will not be able to sue for payment until 30 days have elapsed. It will also impact on your ability to recover interest on a late payment (see below).

Credit due diligence. If possible carry out credit reference checks. See if they have a history of non payment. Obtain references from third parties. A string of County Court Judgments will tell you whether other traders have had similar problems chasing for unpaid debt. Subject to your bargaining position or your sector norms can you take some money up front or offer a discount for prompt payment?– it might limit your exposure.

Three things to remember

Where people are late payers the law provides you with the right to apply an enhanced rate of interest to the unpaid debt. The Late Payment of Commercial Debts (Interest) Act 1998 gives you the right to charge a company 8% above base rate for the period between the date due for payment and the date of actual payment. Hence the reason why it is important to make invoices payable on demand so that you don’t lose out on 30 days interest (see above).

If the debt you are chasing is £5000.00 or less then you could seek recovery through the Small Claims Court. This is a procedure operated in the County Courts to make recovery of debts simpler. In many cases the process can be started on line through the governments own website

If the debt is beyond dispute you could also consider issuing a “Statutory Demand” which effectively puts you in the driving seat giving the debtor the option either to pay up or else be put into liquidations. A word of warning with this last option – while often very effective in putting pressure on your debtor it can back fire if your debtor puts up a defence as to why it is not paying – for example where there is a dispute over the delivery of your services.

After 10 years of economic growth we have probably all become a little lax about credit risk and the ability of third parties to pay. The Credit Crunch has reminded us all that even the most venerable of institutions can risk default. As credit lines tighten the pressure on smaller suppliers increases exponentially. If you have supplied the service or good and there is no issue over the quality of that supply then you should not be abashed to seek recovery for payment. It may be wishful thinking but lets hope that as these troubled times continue our debtors will hear, and act on, the words of Benjamin Franklin who said better to “go to bed without dinner than to rise in debt”.

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Written by David Gordon

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