When faced with situations where one of the parties to a contract fails to fulfil its obligations, it is necessary to take measures to enforce those obligations, i.e. to collect the debt. However, as we see in practice, the parties to the contract (both the creditor and the debtor) do not fully understand what debt collection is, what pre-court debt collection is, what options the creditor has for debt collection, and what the consequences may be for the debtor.
Debt collection is, as a rule, a process in which the creditor asks the debtor to repay their debts. Debt collection can be divided into pre-trial debt collection (voluntary debt collection) and debt collection through the courts (enforced debt collection). While debt collection through the courts is clear to the parties to the transaction, there are many questions about the actions that a creditor can take in pre-litigation debt collection. So what is pre-litigation debt collection, debt transfer for collection, and what is meant by debt sale?
Pre-court debt collection
Pre-court debt collection, or collection, in itself describes the actions it involves, namely ‘pre-court’, which is understood to mean a set of extrajudicial actions taken by the creditor, offering the debtor to voluntarily fulfil their overdue payment obligations. During the pre-trial debt collection process, the parties may agree on the procedure and terms for repayment of the debt, as well as the amount of costs associated with this process. Usually, when creditors discover a late payment, they immediately take action known as pre-trial debt collection. These actions are well known, namely written and verbal warnings and reminders to the debtor to voluntarily repay the debt. These warnings are usually issued in the form of a written document and sent to the debtor at their legal or stated address, as well as to their official email addresses, if any. The parties to the transaction usually indicate their contact information in the contract, but it is recommended that the creditor verify the accuracy of the contact information provided, especially the postal address, so that the debtor can be contacted.
According to Article 16689 of the Civil Code, any creditor may claim reimbursement of debt collection costs in the amount of €40.00. This article of the law stipulates that an unpaid bill for the purchase, delivery of goods or services allows the supplier to claim €40.00 in debt collection costs from the debtor. This means that you have the right to apply to an arbitration tribunal or a state court and request that the debtor be charged €40.00 in debt collection costs, providing evidence that you have taken steps to collect the debt, for example by sending the debtor a warning by registered letter.
In cases where independent pre-litigation debt collection by the creditor is ineffective or the creditor does not wish to spend its resources on debt collection, it is entrusted to third parties, i.e. debt collection is transferred to ‘collectors’ or institutions that provide pre-litigation debt collection services on behalf of the creditor.
Transfer of debt for collection
Given that debt collection services are paid for, pre-trial debt collection measures are usually carried out by the creditors themselves. However, in practice, we often encounter situations where many legal entities have entered into agreements with companies that provide debt collection services, and as soon as a payment is delayed, the debtor is automatically referred to that company. A debt collection service provider is a person who, as part of their commercial or professional activities, collects debts on behalf of or on the instructions of a creditor.
When a debt is transferred for collection to a debt collection agency (collection company), the actions of the administrator of that agency include communicating with the debtor and all other actions required by law to achieve a favourable outcome for the creditor. Statistics show that most debts can be recovered out of court. According to the law, the costs of debt collection are borne by the debtor. Debt collection agencies, like the creditor itself, may place the debtor in public databases of debtors or file an application to initiate insolvency proceedings against the debtor. Of course, before taking the above actions, it is advisable to assess how much this will contribute to debt collection.
Important! When transferring a debt to a collection agency, it is necessary to agree in the contract with the agency on all costs and actions that will be taken. This will protect you from unclear bills and expenses that these companies may require. It is also recommended to ask the service provider to provide regular reports on the measures taken and successes achieved so that you have an understanding of the effectiveness of the actions taken to avoid a situation where you pay for the service, but the company providing the service is not interested in actively working to collect your debt. If you know that debt collection is ineffective, it is advisable to consider applying for enforcement of the debt in a state or arbitration court, or for the debt to be sold.
Sale of debt
In practice, creditors are increasingly evaluating the possibility of selling debts because they do not want to spend their time and resources on collecting them. The sale of debt means that existing debt obligations and rights to collect the debt are transferred for a certain fee to the buyer, who may be any individual or legal entity, including collection companies. By entering into such a transaction, the creditor immediately recovers their capital, saving time and resources. Usually, when selling a debt, the creditor does not earn anything, as the debt is sold at the principal amount or even for less, depending on the terms of the contract. In this case, the creditor also loses nothing, since the amount of the debt is recovered and no additional resources are spent on debt collection. When selling a debt, it is important to agree on all the terms of the contract with the buyer of the debt so that there are no misunderstandings in the future.
The sale of debt in today’s business environment is known as assignment. According to Article 1801 of the Civil Code, an assignment agreement between the assignor of the claim – the creditor (assignor) – and the person to whom the debt is transferred (assignee) may be concluded in any form. The consent of the debtor to whom the claim is directed is not required, and the assignment is valid even if the debtor has not been notified of its existence. In practice, the debtor often learns of the change of creditors only after the fact, when he receives notification from the new creditor that he has assumed the rights of the claim. From the moment of assignment, the successor (assignee) may act as a creditor and exercise the rights of claim on that basis.
Repay your debts correctly! Each of us knows best how to manage our business and how to act in accordance with our field of business. Therefore, the growth of your company is entirely in your hands, and the steps mentioned above are tools that you can use on your way to achieving it!
Automatic translation of an article from Latvian.
The original article was published on 13 July 2023 on the iBizness portal.
Author of the article: Ilga Neretniece, Administrative Director of the Riga Arbitration Court.