How to succeed in debt collection
Debtors will always be part of business or personal life. You will always have people who owe you money or its value. Since accounts receivable are an integral part of a business, they must be managed effectively. The safe point to emphasize here is that for you to be successful in debt collection, you need to have a solid credit policy in place. It is almost impossible for a company to avoid accounts receivable. Even though some companies operate with a zero credit or pay-as-you-go policy, debtors will still show up in one form or another. There are a number of things to appreciate as a business in order to have a sound credit policy in place and ultimately be successful in recovering from your debtors.
Let me stress that debt collection is not easy, so you need to plan. We have those companies who are so confident in their debt collectors, lawyers or other debt collectors to help with debt collection. The truth is that the success of your debt collection lies by far with your business or your person. Before the cause of the debt arises, you need to structure your business processes in a way that makes it easier to collect the debt later.
What is a debt?
The statute of limitations has so far given what I would call the best definition of a debt. It defines a debt as including anything that can be sued or claimed by reason of an obligation arising from statute, contract, tort or otherwise. From this definition, it is clear that a debt can arise mainly in three ways:
l Statute or law – eg levies that become due to a local authority or municipality, eg – Zinwa, Zinara, council tariffs and bills. This debt is created as of right with or without our contribution or contribution.
l Debts arising from a contract – these are probably the most common. These debts arise after a party to an agreement defaults on its obligations, such as payment, thus creating a debt. The contract can range from a rental contract where a tenant does not pay his rents as stipulated in the lease or when a bank customer is in default in the repayments of his loan contract or when, in a contract of sale , the buyer of the good(s) fails to make payment as stipulated.
l Tort debts are those resulting from the fact that one entity or person has committed a legal wrong against another. Torts in our law take many forms, including killing a person or damaging another’s property resulting from an accident, the list is endless.
Why Fast and Efficient Debt Collection Helps Businesses
Here are some of the points that came to my mind that make debt collection essential for businesses and everyone.
It enables a business to be supported by enabling the recovery of monies owed to the business – to ensure the continuity of business operations;
Ensuring that debtors pay within the agreed deadlines, thus enabling companies to also meet their financial, legal and statutory obligations;
Difficult economic environment, increase in payment defaults, debtor default
Incentives to chase debt stem from difficulty raising funds in Zimbabwe’s current economy
Know your customer checks
The importance of Know Your Customer (“KYC”) checks cannot be overstated. This is the area where most, if not all, businesses fail. The success or failure of any debt collection depends on the strength of a company’s KYC. Before considering extending any facility or credit to your customer, it is essential that a company performs a thorough and systematic KYC. This should include the following steps:
Capture customer’s full names – if an individual requests a certified copy of their ID after inspecting the originals, marital status, business and residential addresses, who their next of kin are, etc., proof of residence in the form of utility bills. Take note of the physical address of the customer which must be entered correctly.
On next of kin, follow up and verify that next of kin exists in real life. During one of our missions with a bank, we realized that the contacts and addresses of the relatives were all fictitious, so that we were unable to locate the debtor as well as the relatives.
Check and verify the legal status of your potential client before entering into credit facility agreements – whether it is an individual, club, partnership, company, trust , a company, etc. This is important because different forms of legal persons require different authority to transact with third parties. parties. It is important to check who authorizes the transaction, for example, the ordinary director would need a resolution of the company, the managing director can directly represent the company, etc.
In other organizations, there must be a resolution from the organization authorizing the transaction – if you do your KYC like this and check the legal status, then you know who to sue in case of default, e.g. partners, members, etc Where your client is a corporation, debt liability would be limited to a corporation’s assets, but then you can extend liability to shareholders, trustees, etc. through a surety bond signed by the individual directors or trustees.
Regularly renew customer contact information, if necessary
A properly performed KYC helps a business ensure that it easily locates the debtor in the event of non-compliance with obligations under the agreement. The impossibility of locating the debtor means that no recovery or litigation procedure can ensure.
Importance of Appropriate Terms in Agreements
Once you have done your KYC appropriately, the next step is to ensure that the agreement giving rise to a debt must be sufficiently clear as to the contractual obligations of the debtor. This is important when it becomes necessary to collect the debt. It is not enough for you to hand over your collection portfolio to a lawyer, debt collector or other debt collectors. Their success also depends on the quality of your agreements. It is therefore good practice that your agreements incorporating credit terms are constantly reviewed by an experienced lawyer with a view to identifying gaps or loopholes that may hinder the success of debt collection.
This article is not intended to be exhaustive on the debt collection issues under the topic nor to be specific legal advice – it is intended to provide a general overview on the subject. If you need specific advice or assistance with debt collection, you can contact the author or your lawyer.
I will cite some of the common contractual provisions that can become problematic.
Amount to be paid, period and place
The credit facility agreement should be clear about what the parties have agreed to do, for example when you agree to lend a sum of money to a business or sell goods on partial credit, the agreement should state what goods and prices the goods will be sold, the deposit to be paid, if applicable, and the deposits due in respect of the balance and the period of the deposits and the deadlines for the deposits. The agreement must indicate the date and place of its conclusion as well as the method of payment and/or the place where the payments must be made. Similarly, the date of agreement is very important because it sets in operation the deadlines, whether the debt is now due or it is prescribed. The place of the agreement determines, among other things, the applicable law.
The agreement should also provide that the debtor pays the legal costs in case the creditor goes to court. The clause should specify that the fees are payable at the practitioner and client level. It should be noted that these fees are only payable after the conclusion of the legal proceedings and the court approves the fees.
In addition, the agreement may provide for the competent court to hear the case. This is important and saves costs because normally the creditor must sue the debtor in a court closest to the debtor’s place of residence.
As part of the agreement, consideration may also be given to requiring the debtor to also execute surety bonds where directors, trustees or third parties stand surety for the debtor. This helps the creditor ensure that if the debtor defaults, they can still sue the surety for payment.
A carefully drafted contract is like the proverbial “point in time”. Much could have been said about contractual clauses, but it all depends on the nature of the agreement in question.
Use of IOUs
Simply put, an acknowledgment of debt (AOD) is when a debtor acknowledges their obligations in writing and agrees to repay the amount according to the terms agreed between the parties involved. An AOD is of great value if the debtor is in default and a summons is required.
An AOD can be used as a form of contract, and particularly useful as a formalization of a verbal contract, and the creditor now wants to secure their rights in writing specifying the agreed terms and conditions of repayment or settlement. The good news is that an AOD is considered by our courts to be a form of uncontested proof of indebtedness, and will generally take the shortest route to concluding a court proceeding called a provisional conviction proceeding.
An AOD can also be used when the creditor no longer trusts the debtor or if there is a history of past due payments. AOD is also used when the debtor fails to meet contractual terms, such as when he fails to pay an agreed amount or payment date. The AOD will restructure the terms of the contract as to when, where, how and the amount due, as well as the appropriate rate of interest, are payable. This is to ensure that the debtor is fully aware of all terms and conditions, avoiding any confusion. A DOA can be signed by more than one person.
Collect your debt in time before it is time-barred
Businesses must always act in a timely, swift and targeted manner to collect debts as soon as they become due. Under Article 16 of the Statute of Limitations, limitation begins to run as soon as the debt becomes due.
Once a debt becomes due, it must be collected. Under the statute of limitations, the failure of a creditor to collect an ordinary debt within 3 years leads to a limitation of debt. In simple terms, if a period of 3 years elapses before you start legal proceedings to collect the debt, you can no longer collect the debt by law. The provisions of the law conform to the policy of law embodied in the Latin phrase vigilantibus non dormientibus jura subveniunt, loosely translated to mean that the law will help the vigilant but not the lazy.
The running of the limitation period can be interrupted when the debtor acknowledges his debt or when you take legal action to recover the debt. As soon as the legal proceedings are stopped, the order begins to run again. It is therefore important for businesses to take timely action to collect their debts to avoid statute of limitations and the loss of money or its value.
Alex Majachani is a lawyer at ALEX F AND ASSOCIATES, he can be contacted at 0774807058 or [email protected]