How to manage outstanding receivables?

How to handle an outstanding customer? Lawsuits, collection agencies, credit insurance can recover all or part of bills

An unpaid debt is a debt whose probability of recovery by usual means is very low. Despite numerous reminders, dunning letters plus a formal notice sent, your client does not pay and has obviously no intention to do so. It is necessary to move up a gear to force your client to meet its commitments.

We also speak of unpaid debt (often definitive) in the event of insolvency of the buyer and insolvency proceedings (judicial recovery, chapter 11, etc.).

In this case, the debtor is protected from his creditors by legislation. They cannot initiate recovery actions and must deal with the commercial court to hope to recover part of their debt as an unsecured creditor, that is to say who does not have any lien or mortgage on this debt. Their chances are therefore very slim, being the last to be compensated.

In all other cases, a litigation action is therefore required!

Unpaid debt has an impact on the company's cash flow and its profitability because it is necessary to make a provision for doubtful debt to reflect this situation in the company's accounts (precautionary accounting principle). If it is final, the debt will be written off.

From amicable recovery to litigation

The absence of payment after sending the formal notice means that your client obviously has no intention or no possibility of honoring his debt. It is necessary to strenghten your action to force him to respect his commitments.

This new phase in the collection process is more coercive with the completion of litigation actions. For this, several solutions are available to you depending on your internal organization and the resources available to you.

Collection of unpaid trade receivable. What to do?

There are several possibilities for handling a dispute which depend on the organization of your company and its commercial culture.

Some will prefer to manage these cases internally while others choose to outsource their management. Indeed, litigation action is by nature unfriendly and therefore politically embarrassing for companies that make customer satisfaction an absolute priority.

Furthermore, the management of litigation is rarely within the competence of a company's employees. Even large groups do not necessarily have a dedicated legal department to manage these problematic cases; accounting or collection teams often stop their action at the end of the amicable stage.

However, if the help of a lawyer for a judgment or of a bailiff to execute an enforceable title appears essential, the creation of an order for payment file or an interim provision is, depending on the countries, within reach of all.

Which partner for which action?

  • First option, you launch legal proceedings against your debtor yourself. Choose the one best suited to your case taking into account that legal actions are different according to the country:
  • The benefit of legal action is, if successful, to see recovery costs offset by:
    • A conviction of the debtor under article 700 of the new code of civil procedure (the person who loses pays the costs of the party who won the case). This example concerns French regulation.
    • An application of the penal clause (obtaining damages paid by the debtor because he has not fulfilled his commitments).
    • Obtaining late payment penalties in accordance New Economic Regulation law of 2001, applied in Europe, or Condition 4 of Table A, Schedule 7 of the Transfer of Land Act in the USA.

In the event of a court judgment, it is necessary to call on a lawyer to defend your case. The forced execution of an enforceable title must be carried out by a bailiff.

Bailiffs are increasingly offering to intervene before obtaining an enforceable title. They rely on the psychological effect of their action (often sending a letter with their office letterhead) to obtain results. This service is similar to that offered by collection agencies. However, be careful to preserve the commercial relationship which remains possible even in the event of litigation.

  • Second option, you want to delegate the management of litigation that is not your job and you prefer to leave this operation to professionals:
    • Establish a partnership with a collection agency which will take in hand the collection of your unpaid bills by making a new friendly recovery action followed by a legal action if necessary.

The collection agencies market is very competitive and has many players. Some have ethically questionable practices (telephone harassment, threats, etc.). Others, on the contrary, take care to adapt their action according to each situation and to respect the debtor, which preserves the image of the creditor.

Also pay attention to a very frequent practice of these actors who decide to carry out this or that action not based on the interest of their client but on their own profitability on the files in question. You will need to choose your partner with great attention!

  • Third option, you subscribed to a classical credit insurance and you got a guarantee on your client:
    • Declare your claim to your credit insurance in order to be indemnified according to your contract.

Some credit insurances are very effective in debt recovery, in particular because companies have no interest in seeing their rating downgraded by these important players in the economic world. If their action is successful, and even if they have already compensated you according to the amount of your debt, they may reimburse you for the entire amount of the unpaid amount.

The use of a Credit Management software also changes the game regarding bad debts collection. Status of invoices concerned are managed inside the software, transfer to a collection agencies or a lawyer can be done and followed in the tool. It facilitates communication between player thanks to connectors, portals, with third party solutions. All credit management activities are centralized at the same place, allowing a more efficient follow-up for you and your partners.

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