What is Debt Recovery

What is debt recovery?

To understand why it’s not cost-effective to recover money in many situations, first it’s important to understand why debts are incurred.

In no particular order, the most common reasons for this are:

  1. The debtor simply doesn’t have enough money to pay for their debt, be it a credit card debt, personal loan or money owed to a friend/family member
  2. The debtor’s circumstances have changed since they incurred the debt and they can no longer afford repayments
  3. The debt has arisen as the result of a contract dispute or a dispute over the quality of work or goods received
  4. The debtor simply doesn’t want to pay

In the vast majority of cases, debts are incurred because the person who has incurred them, the debtor, simply can’t afford to pay them. This is most commonly found in landlord and tenant disputes where, due to a change in circumstances, tenants can no longer afford to pay their rent.

However, outstanding debts triggered from the debtor not wanting to pay are more common than you might think.

For example, when renovating a house, you might think it would be easier to hire a contractor for convenience and ensure everything proceeds to plan and to the right level of quality. If, once the works are completed, you discover the renovations have been poorly done, you may not want to pay, or you may want to pay a lower sum.

This could open you up to a debt recovery claim from the contractor, if he feels it is justified.

Debt Recovery Solicitor Cost Effectiveness

When is it not cost-effective to use a solicitor for debt recovery?

There isn’t a single answer to this question. As with all legal cases, there are exceptions, which is why you should always consult with a solicitor before proceeding with a debt recovery claim.

Money claims below £10,000 can be made online through the Small Claims Court and are relatively straightforward to do yourself. There is a fee to pay depending on the size of the debt, and cases typically take around 6 weeks to 6 months to conclude.

For example, if you are owed £1,000, you’ll need to pay £60 to the court for the initial application. If the court finds in your favour, this doesn’t mean that the debtor pays you straight away. They can choose not to, and to get the judgement enforced, you’ll need to pay another fee ranging from £33 to £308, depending on the situation. And that’s if you know which fee you need to pay. So in the best case scenario, you’ll likely need to pay £93 to recover £1,000, in other words you’ll recover £907 or roughly 90% of your money.

A solicitor will charge for an initial letter or to run the claim on your behalf, and 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.

Furthermore, many online debt recovery services advise they will recover your money for £20-£50, but what they mean is they will write a letter to the debtor advising you’re about to take action. The fees don’t include issuing the actual proceedings, the court fees or enforcement once you have a judgment. All these incur additional fees.

Claims over £10,001 can’t be put through the small claims track, but you can still choose to represent yourself and push the claim through. However, the process is more formal and you risk your case being struck out on a formality if you’re not prepared.

And this is all before considering whether the debtor has the money to pay. If they are bankrupt or have absolutely nothing, enforcing a judgement won’t do much good as they have no money to reimburse you with. All that money in fees and professional charges will have been for nothing.

The general rule of thumb is that the more money is owed, the more cost-effective it becomes to use a solicitor as the amount you recover will be greater.

The other rule is if the debt is going to increase over time if not dealt with now, for example a credit card debt with interest or rental arrears, you should seek legal advice.

When to use a debt recovery solicitor

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

We’ve talked a lot about why you shouldn’t use a solicitor to recover debts, but there are many good reasons as to why you should.

The reason we advise clients to seek legal advice on claims lower than £10,000 is because recovering the debt may not be the only legal issue they are facing.

For example, if you’re a landlord and your tenant is £700 in arrears because they can not or will not pay their rent, asking them to pay it is no good. But that leaves you with an occupied property, potentially with a mortgage, that is only draining your finances. You’ll likely want to evict them to get new tenants in and the cash flowing again. But this needs to be in line with their tenancy agreement and established procedures. Without legal help from an experienced landlord and tenant solicitor, you risk failing to take back possession of your property, and the losses mounting.

In this situation, it simply wouldn’t make sense to pursue a debt recovery matter on its own as it’s only applying a plaster to the issue.

When it comes to larger claims in excess of £10,001, the likelihood of the other side having legal representation increases in line with the complexity of these cases.

If you are representing yourself against an experienced litigation solicitor, your chance of success diminishes significantly unless you’re a genius in disguise.

Using the same maths as the case recovering £1,000 above, let’s look at a case where a business is owed £100,000. Through a combination of professional fees and court fees, these cases can easily cost in excess of £10,000+ to fight. But even if this is the case, you’ll recover £90,000 that you would have otherwise written off or incurred.

The percentage gain is the same, but the absolute amount of money re-gained is clearly much, much higher. £90,000 buys a lot more than £900.

But the risk of losing the case is also higher, especially if the other side is awarded their costs. This is why having the right solicitor on your side is vital.

For commercial debt recovery issues, questions can also arise of whether the growing debt constitutes non-performance within the contract, and whether or not this nullifies the contract in its entirety. This wouldn’t necessarily come up if you are only looking at recovering the monies owed.

Debt recovery solicitors will also advise you on your alternatives to seeing the case through to a final hearing, which many claimants want to avoid due to the timings and costs involved. It can take as long as 2 years to get a hearing date listed in the Crown Courts. This can include negotiating an out of court settlement.

This isn’t suitable for everyone, but will depend on your circumstances. For example, if you’re owed £50,000 and want £25,000 to start a business, you might be more flexible about settling sooner and cutting your losses than waiting until your case is listed. After all, the £25,000 investment into the new business could return far more than the original £50,000 owed.

Finally, if the debt you are claiming for is significant, a debt recovery solicitor would be able to help you calculate the interest owed, which you can also claim for. Depending on how long the debt has been outstanding, this can be a significant amount.

In short, there are a huge number of circumstances where seeking debt recovery legal advice can be advantageous.

Risks of Debt Recovery

What are the risks of debt recovery claims?

The biggest risk in every debt recovery claim is the threat of a counterclaim.

Whether you’re starting or defending a debt recovery claim, if your case is built on flimsy evidence, the risk of the other side counterclaiming is high, especially if they are taking legal advice.

A counterclaim doesn’t necessarily mean the other side will claim for the money off you instead, but it may mean the original claim is struck out.

The other big risks are the ones we talked about earlier, specifically that the debtor has no money or assets to re-pay the debt, or that you pay more recovering the debt than you stand to gain.

There are steps that our debt recovery solicitors can take to help secure what you’re owed. 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. This will stop these actions.