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debt recovery through the courts

Legal action should be a last resort. But if you are at that stage then you should understand the options and choose the correct legal route. Before going ahead with debt recovery consider what you will get out of it in the end.

You will obviously lose the customer and you can't be certain of receiving the money owed. Credit reference agencies can give you a credit rating for the defendant and details of any unpaid County Court Judgments. Even if you win judgment, the customer is required to pay (including court fees), but if they do not pay up you will then have to take steps to enforce the judgment. You have to pay upfront for court fees, solicitors costs etc, although you should be able to claim these back.

The small claims process is an inexpensive and straightforward way of settling disputes for small amounts. This small claims track is often used for consumer claims, faulty goods, goods not supplied, goods recovery, debt, breach of contract etc. For claims between £5,000 and £15,000 (and you might want to use a solicitor for these) there is a fast-track process, and for claims above that amount there is a multi-track process. Legal aid is not normally available for small claims cases and legal costs are not normally recoverable. With the debtor's agreement, larger sums can also be dealt with by a County Court Judge, but larger claims are normally heard in the High Court. High Court action may be complex and very expensive. Professional help is essential.

Whatever course of legal action you choose, you must send a final warning letter before you begin. Not only does this often produce the money, but you can be penalised by the court (on costs) if you don't!

If you want to use a solicitor, make sure the firm has a department for specialising in debt recovery. Ask if the firm has a mediator or dispute resolution service so you can consider this alternative. Make sure you know exactly how you will be charged (e.g. hourly, a fixed fee or a percentage of the sum recovered). If the solicitor charges on a "no win, no fee" basis, check if there are any hidden costs. Will you have to pay court costs for example?

how do you make a court claim?
First download claim form NI from the HM Courts Service website, or alternatively file a claim using Money Claim Online. Give your name, the name of the defendant, the value and brief details of the claim. Either type or use black ink and capitals. You may add the court fee and interest to the amount you are claiming. If a solicitor prepares the claim you may be able to add other charges. Make sure the form is signed.

The claim can be sent or taken to any County Court, or if it is for £15,000 or more, you may use the High Court. Supply three copies of the claim form to the issuing court and if there are additional defendants send a form to each one. You must pay the court fee upfront. The form will be checked by court staff, given a number and served. Gather any supporting evidence such as invoices. You may have to send copies of these to the defendant and to the court.

what happens next?
The defendant is allowed 14 days from the deemed date of service of the claim, but can request another two weeks.

Hopefully this will be enough for the defendant to pay the amount claimed, or at least admit the claim and ask for time to pay. Most defendants either pay up or do nothing.

However if the defendant does choose to defend the claim you will receive an allocation questionnaire to complete. Of course you must be aware that the defendant may file a counterclaim against you.

If you have no chance of winning the claim or have no reasonable grounds for the claim the judge may dismiss the case without a hearing. A preliminary hearing may be held if the judge thinks that the case requires special or unusual steps to be taken - perhaps to ensure a fair hearing, or if the defendant has no realistic prospect of defending it.

If no defence is entered you only need wait until the end of the permitted time and then apply for judgement. Usually there will be no hearing and a judgement will be made in your favour. However you still won't have the money and unless the defendant then pays you must take steps to enforce the judgment.

a contested court case
If a defence is entered the case goes to a hearing or trial and unless an agreement is reached in the meantime a judge will decide the case. Complete the allocation questionnaire (the defendant must also complete this), which helps the judge decide whether the small claims track, fast-track or multi-track option is suitable

the small claims track (i.e. the small claims court)
This is informal and quick. Evidence is not normally given under oath, and claimant and defendant are expected to represent themselves. If you are represented you will not get costs for this. Limited costs can be claimed for loss of earnings, travelling etc. plus the cost of any witnesses and experts. You can have written or verbal evidence and you will get a quick decision and a copy of the judgement.

the fast track and the multi-track
These procedures are longer, complex, much more formal and the case always goes to trial in court. Witnesses will be cross-examined and claimants and defendants do not normally represent themselves. Costs, including court fees and legal fees are usually awarded.

your right to recover interest
There are three circumstances when you have a right to ask a customer to pay interest. Firstly, if interest is permitted by a contract you can claim it. Secondly, interest can be claimed on an issued claim form at a flat rate of 8%. It only applies if the case is won or undefended, and it runs from when payment was due until judgement is given by the court. If payment is made before judgement, interest stops. The third type of interest is statutory interest and can be claimed under the Late Payment of Commercial Debts (interest) Act 1998. The rate is 8% over the Bank of England base rate. It does not apply when you sell to the public, only when both seller and buyer act in a commercial capacity. For contracts made from 7th August 2002 all businesses and the public sector can claim against all businesses and the public sector. It can also be claimed after late payment has been received and the time limit is six years in England and Wales.

enforcing the judgment
This is often harder than obtaining it in the first place! If you have asked the court for an order to obtain information from the judgment debtor, the debtor has to go to court and answer questions under oath about their finances. Once you know your debtor's circumstances you can decide whether it is worth using an enforcement action.

A warrant of execution will allow court bailiffs to take goods from the home or business of your debtor. Certain goods cannot be taken, but after a holding period the goods will be sold at auction, and after fees and expenses are taken out, you get the remaining balance.

Alternatively, especially if the debtor is in employment, there may be an attachment of earnings order. The employer is ordered to make deductions from the person's wages.

The court may enforce a third-party debt order to freeze money that might otherwise be paid to someone who owes you money. Then the court decides whether all or part of the money will be paid to you.

In other cases a receiver will be appointed to receive money that will become owed to the customer, for example rents. Another option is a charging order, whereby you take a legal charge on property or financial assets and you get your money when they are sold.

In a last resort you can apply for a bankruptcy or winding-up petition.

winding-up and bankruptcy petitions
These are ways of enforcing judgement after a claim has been won, so you can get your money. Winding up applies to companies rather than individuals, and after the winding up the company ceases to exist. However if the company is insolvent at the time, not all the creditors get paid in full. There are rules and each creditor gets a percentage of what they are owed.

Bankruptcy on the other hand, applies to a person or a general partnership. If it is a general partnership, all the partners are made bankrupt. When bankruptcy occurs the assets are sold and the proceeds are paid to the unpaid creditors. Each creditor gets a percentage of what they are owed. Often the threat of winding-up or bankruptcy is very effective but if a customer still refuses to pay there are steps to take. Consider a statutory demand, delivered to the customer, preferably by hand; you can get one from a legal stationer or solicitor. Make sure the customer has a fixed number of days to pay after they receive the demand. If they still do not pay up you can issue a winding-up petition or bankruptcy petition. The customer will be made bankrupt if all procedures are followed correctly, but just because you issue the petition does not mean you get priority over what money becomes available!

Always seek legal advice before you act, and remember there is no guarantee you will be reimbursed. Bankruptcy and insolvency are a last resort and initiating the process should not be taken lightly. It takes time to recover a debt through the courts, it can be very stressful, and you aren't guaranteed to recoup your losses. When a company is put into liquidation or a person is made bankrupt, you may have to appoint a licensed liquidator or trustee in bankruptcy. This costs you money and you may have to guarantee these fees if the money recovered is not enough. Obviously try not to get into this situation in the first place by being very careful who you extend credit to. Sometimes you may have to accept the unpalatable fact that sometimes a customer simply will not pay.

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