Aging receivables and bad debts can strain the liquidity of any business and even push it towards to cash flow crunch. Recovering such debts is an arduous (and sometimes very costly process).
However, many businesses often do not have a system or methodology in its debt recovery process. Often businesses resort to engaging lawyers or third party debt recovery service providers to recover their bad debts. Before doing this, businesses could consider putting in place their own debt recovery processes.
Here is a step by step guide on DIY debt recovery or collection options.
- How Do You Define Bad Debt?
- Making Sure You Have a Valid Claim Against the Debtor
- Understanding Your Debtors
- Reminding The Debtor Of Overdue Payment
- Filing A Court Claim Against The Debtor
- Letter of Demands
- Statutory Demands
How Do You Define Bad Debt?
If you’ve issued an invoice that’s overdue and still unpaid, you’ve unfortunately now saddled with bad debt.
Bad debt is a pain for businesses. The liability sits on your balance sheet like a red mark. Often times, you spend more time chasing for the payment that you do actually performing the work.
Making Sure You Have A Valid Claim Against the Debtor
Before chasing your customer for payment, it’s critical to first ensure that the debt has become due and payable. This means that you’ve fully delivered the goods and services as per the invoice or contract.
If you’ve made a physical delivery of goods, ensure the customer signed off on the delivery slip. If you’ve provided a service, ensure that the customer has signed off on your successful completion of the task. If you have issued an invoice, make sure that the invoice has become overdue and you are not seeking repayment prematurely.
Once it’s clear that you’ve upheld your end of the contract, and yet have not received payment, it’s time to start taking steps to reclaim your bad debt.
Understanding Your Debtor
This is an important but often overlooked step. Before embarking on the debt recovery process, it is important to understand against whom you are making a claim. Is it a company or an individual? Is it a large company or an SME? If it is an individual, what is his or her credit rating? The answers to these simple questions will determine which debt recovery tool to use.
Reminding The Debtor Of Overdue Payment
Before taking any legal action, it’s important that you first try to resolve the overdue payment privately. Once the courts get involved, the paperwork for both parties increases substantially, further distracting all parties from their core businesses.
The first step would be to clearly remind your debtor of the overdue payment. Here’s an example of a message you could send:
We have an overdue invoice #116 from your firm that was due on 15th February 2021 (6 weeks ago)
Our firm has successfully delivered all the goods and services as per the invoice and payment has been overdue for [number] days.
If our firm does not receive full payment of the invoice within the next 14 days, we will proceed to take legal action to recover these overdue amounts from you.
All of our rights are reserved.
It’s best to deliver the above message via several mediums – phone, letter and email. If possible, do record the delivery to show the courts that you’ve made the attempt to reclaim the payment.
These emails can be automated and scheduled to be sent out weekly. Do not forget to remind the debtor that interest under the unpaid invoices continue to accrue while they remain unpaid.
If after several reminder letters, you do not receive a response from the debtor, it is time to consider escalating the matter. If the debtor responds to dispute your claim (for example – to dispute that you had performed the contract to required specifics), you may need to seek legal advice on that.
Filing A Court Claim Against The Debtor
- This applies for claims which are less than S$20,000 (or S$30,000 if both sides agree to )
- Proceed to the SCT Website and login. The cost to file a claim ranges from 10 SGD – 20 SGD
- Prepare all supporting documents – including the underlying contract, the unpaid invoices, and your repeated chasers for payment.
- You will need to write a brief description of your claim which will read something like this “On date, we issued invoice no XXX to the debtor for goods or services provided/rendered under Contract no XXX. Payment under Invoice no XXX was due on date, and despite several reminders since, the debtor has not made payment under the invoice. “
- Once all the documents are submitted, the tribunal will set aside a date for the hearing. Take note, the Small Claims Tribunal has a strict no lawyers rule.
- If you succeed in the SCT, you may enforce the SCT order against the debtor, including seizing its assets, or garnishing its bank accounts.
Letter of Demand
If your claim, is above S$20,000, the SCT is unfortunately not an option and if you wish to file a claim in the State Courts or the High Court of Singapore. Before you do so, you may wish to issue an official demand letter to the debtor. This is something you can actually do yourself without having to engage a lawyer. If you would like to understand how you can do this yourself, you may get in touch with us for a free consult.
A statutory demand is like a letter of demand except that it contains special wording that stipulates that if the debtor fails to pay, they are legally insolvent and may be placed in liquidation/bankruptcy. To find out if issuing a statutory demand is appropriate for you, do get in touch with us for a free consult.
If you understand your rights, the process for exercising your legal rights to seek the return of your bad debt can be a relatively painless and expeditious process. Often, with the appropriate amount of pressure, debtors will may repayment rather than face legal action.