What is debt?

A debt is when someone owes something, typically money, to another party.

Types of debts can include:

• Credit cards
• Mortgages
• Loans
• Store credit
• Borrowing money from friends and family
• Unpaid invoices and bills

Debts can carry a lot of stress and stigma, but the reality is that most people will have some form of debt at some point in their lives.

How do people end up in debt?

In the majority of cases, a debtor will incur a debt because they can’t afford to pay it off and there are many reasons as to why this might be.

The most common reasons for debt include:

• The debtor simply doesn’t have enough money to pay for their debt.
• Circumstances have changed since incurring the debt, and they can no longer afford repayments.
• There is an ongoing contract dispute or a dispute over the quality of work or goods received.
• It is an accidental debt. A prime example for 2024 is the doubling of energy bills meaning people’s income can no longer cover it.
• Someone needs emergency repairs done to their car or home and doesn’t have a contingency fund, so turn to credit cards.

In some circumstances, debtors can afford to pay off their debt, but they just don’t want to pay. And this happens more than you might think.

This is often the case in the construction industry. Someone hires a trader to complete renovation work and is unhappy with the finished product. They refuse to pay or demand a lower fee, and the trader has to take the case to the small claims court.

What is debt recovery?

Debt recovery is the process of getting one party to pay off the outstanding amount of their debt.

There are a few ways to claim debts, and different schemes to help make it more affordable for the debtor. One popular method is setting up a payment plan. This is where both parties agree to an amount and then set up a standing order or direct debit to continue until the debt is paid.

Methods for debt recovery

There’s no single answer to debt recovery. Many elements will influence how you try to claim back a debt. Sometimes, it’s not cost-effective to recover anything because the expense outweighs the debt.

Here are some avenues you may want to consider for your debt recovery.

Small Claims Court

You can claim under £10,000 through the Small Claims Court, which is a relatively easy process you can handle yourself.

The court fees range from £35 to £455, depending on the value of your claim. The typical timeline for a small claims case can range from 6 weeks to over a year.

Let’s say the debtor owes you £1,000. The initial court application fee is £70. However, if the court rules in your favour, that doesn’t mean the debtor will pay you immediately. You’ll then need to pay an additional fee ranging from £78 to £119 to get the judgment enforced. The costs vary depending on the enforcement method you choose.

Even in the best-case scenario where the court rules in your favour, you wouldn’t necessarily recover the full debt.

Using a solicitor

The price of instructing a solicitor will vary depending on what services they complete.

They can write up and send a Letter Before Action. This is a document sent to the debtor explaining you will take further action. It also provides the debtor a last chance to pay before you escalate it.

Although templates are available for Letters Before Action, this is a regulated industry. Using a solicitor for drafting or reviewing is advisable, otherwise your letter may be non-compliant with the Pre-action Protocol for Debt Claims contained in the Civil Procedural Rules.

Fees from a regulated firm will vary from £300 to £1,000 or more. This quickly wipes out any money you expect to receive back.

The process becomes more formal for claims over £10,000 and can’t be handled through the Small Claims Court. You can represent yourself, but there’s a higher risk of your case being struck out on a technicality if you’re not well-versed in the procedures. This is where having a solicitor’s expertise becomes more valuable.

The general rule is that the higher the value of the debt, the more cost-effective it becomes to use a solicitor, as the amount you ultimately recover will be greater and therefore more unlikely to exceed legal fees.  Additionally, if the debt is going to increase over time, such as a credit card debt with interest or growing rental arrears, it’s advisable to seek legal advice sooner rather than later.

Debt recovery services

Some online debt recovery services claim they can recover your money for a fee of £20-£50. However, what they typically mean is that they’ll just send a letter to the debtor advising them of the impending action. The process of issuing proceedings, paying court fees, and enforcing the judgment incur additional costs.

Debt collection companies can track down debtors and cover all communications with them, taking some of the stress away from you.

Debt recovery services are not the same as bailiffs. Bailiffs can go to a debtor’s address and enforce repayment. They can only collect debts if a debtor hasn’t met a court order to pay.

Handling debt collection yourself

You can pursue debt repayments privately and not involve any third parties.

Although you may save some money by chasing the debt yourself, you should keep in mind that what you are doing won’t have a legal standpoint.

For example, if you and the debtor agree on a repayment plan, they are under no legal obligation to keep it up unless there is a court order.

When should I use a solicitor to help with debt recovery?

In some circumstances, it’s imperative to use a solicitor. Sometimes you may have more than an unpaid debt on your hands – other legal issues may also be at play.

Beyond a simple debt recovery

Let’s consider the example of a landlord whose tenant is £2000 in rent arrears. Asking the tenant to pay the outstanding amount is not enough. The landlord needs to regain possession of the property, which involves following the tenancy agreement and legal procedures. Without the guidance of an experienced solicitor, the landlord risks failing to take back control of the property, and the financial losses could continue to mount.

In this scenario, pursuing the debt recovery matter in isolation wouldn’t make sense. It would be a temporary solution to a larger problem. The landlord needs a more comprehensive legal strategy to address the underlying issues.

In the context of commercial debt recovery, the growing debt can constitute non-performance within the contract. Non-performance, or breach of contract, occurs when one party fails to fulfil their contractual obligations. It is typically considered a breach if a debtor fails to pay the amounts due under the contract. Whether this breach could nullify the contract in its entirety depends on the specific terms and the nature of the breach.

These kinds of issues wouldn’t necessarily arise if you only look at recovering the monies owed.

Larger claims

The increasing value of a claim generally affects the likelihood of the opposing party having legal representation. If you’re representing yourself against an experienced litigation solicitor, your chances of success diminish significantly.

Pursuing a claim against a debtor who owes your business in the tens or hundreds of thousands involves weighing the potential recovery against the costs and risks associated with legal action. The legal fees will likely be high, but you can still recover a large sum of money.

Of course, the risk of losing the case is higher in larger claims, especially if the court awards the opposing party their costs. This is where having the right solicitor on your side becomes vital. They can advise you on the best course of action, including the possibility of negotiating an out-of-court settlement. Many claimants prefer this method to avoid the time and costs involved in a full hearing.

If the debt is significant, a debt recovery solicitor can help you calculate the interest, which is also claimable. Depending on how long the debt has been outstanding, this can be a significant amount.

What are the risks of debt recovery claims?

The biggest risk in every debt recovery claim is the threat of a counterclaim or defence. This risk increases if your case relies on weak or disputed evidence, and whether the other party instructs a solicitor.

A counterclaim doesn’t necessarily mean the other side will request money from you. It may lead to the court striking out your original claim.

Another significant risk is that the debtor simply doesn’t have the financial means to repay the debt, or that the cost of recovering the debt exceeds the amount you’re trying to reclaim. This is why it’s crucial to carefully consider the cost-benefit before pursuing a claim. Even if the court orders a party to pay the debt, it will remain outstanding if they don’t have the means.

There are steps that our debt recovery solicitors can take to help secure your claim. For example, if you think the debtor will attempt to hide their finances or transfer the ownership of their assets and feign bankruptcy, you can get a financial freezing order put in place.

How can a debt recovery solicitor help?

Debt recovery can be a minefield, with numerous factors to consider when deciding how to pursue a claim.

Our debt recovery solicitors in London and Brighton offer no-nonsense advice on how to approach debt recovery. If it’s easy for you to handle yourself, or the legal fees outweigh the potential recovery, we’ll be upfront and tell you that.

However, if the debt and complexity increase, we can help you regain control and recover the debt. We have a range of tools and strategies to ensure the debtor can’t hide their true financial position.