There are a few ways you can try to make your debtor pay what you are owed:
- Hire a professional debt collector. Ask around for recommendations and also be aware of their costs and fee structure: commercial agents normally collect fees and a percentage of the funds they recover on your behalf.
- Take legal action immediately using a solicitor.
- Start the process of claim using a letter of demand. This is essentially legal action you can manage yourself.
The first two options will cost more. If you use a letter of demand, you manage the process, at least initially, and you will find you can save a lot of money.
What is a letter of demand?
It’s a formal request to be paid for an outstanding debt that you are owed. You may have provided an individual or a business with goods or services and are still awaiting payment of your invoice. If you have already asked them several times, sent a late notification and issued further requests for payment – a letter of demand is a more formal way to advise your debtor that you will take action in court if they do not pay you within a specified period.
How does it work?
You send at least one letter requesting payment within a ‘reasonable’ amount of time. What is ‘reasonable’ depends on a number of factors but you must give the debtor time to make arrangements and payment.
The number of letters you send depends on a few things such as time restrictions for your outstanding debt and how many other requests you have made for this same payment.
After you can show you have given the debtor more than one official opportunity to arrange to clear your debt and at least 21 days in total to pay, you can then lodge a final claim (called a Statement of Claim) in your local court. The cost of filing the Statement of Claim depends on the state and the amount of the debt but filing fees generally range between $21 and $270.
What should you include in your letter of demand?
Your letter of demand should contain:
- The amount of the debt
- The date the original debt was due
- The description of the debt (i.e. money was owed for X goods or Y services provided on Z date)
- Evidence of debt due: contracts, agreements, invoices, emails that agree to the work to be done or goods to be delivered and paid for, or other that may indicate and make clear that both you and your debtor agreed payment and the terms upon which payment was to be made.
- Any subsequent requests you have made for payment
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Are there any restrictions for sending a letter of demand?
Yes. Each court in each state and territory of Australia has its own restrictions on the amount that can be claimed and timing for making any claim to collect the debt. You need to ensure you know what these are and which court to file your claim in.
You also have to make sure you can prove in your claim that your letter of demand was sent and received. Sending your letter by registered post or using a ‘service’ firm will ensure you can show proof of delivery.
Then what happens?
The court will give the debtor between 21 and 28 days to respond and if they don’t, you will be able to apply for what is called ‘default’ judgment, which means you don’t have to go to court and you have the right to claim your debt.
Alternatively, they may respond and offer to settle by agreeing a payment schedule (done through forms lodged officially with the court) or they may lodge a ‘counter claim’ (defence) disagreeing with the amount or payment due altogether. You will have to go to court in this case.
How do I get paid?
You will either have:
- A default judgment as the debtor did not respond and you will have an enforceable legal right to your money;
- An actual judgment if you go to court and they rule in your favour;
- An agreement confirmed by the courts for a payment plan.
Normally the debtor will pay you after all this. If you still do not get paid, you can again file with the courts for enforcement of their ruling. This means they can do a number of things to ensure you are finally paid:
- Garnish the debtor’s salary
- Sell the debtor’s assets
- In extreme cases, put them in jail
- It also goes on the debtor’s credit record.
These are quite extreme measures to take, so consider whether it’s in your interests to take them before doing so, particularly if you ever want to do business with the client again at any point.
Also make sure you understand the costs involved in filing your claim, serving the claim and for any other incidental filings. Most of the time, a letter of demand will be enough to encourage your debtor to pay, so costs won’t be a problem.
One more thing: do not feel bad about taking action. You have done the right thing and provided the products or your services, it is the debtor who should feel bad for accepting without paying!
What are your tips for handling late-paying debtors?