When a customer fails to make payments, your company's profitability may be seriously impacted. If you need to collect and recover debt, you should investigate all possible methods before it becomes a litigation case.
This is where pre-legal debt collection enters the picture. It acts as a vital buffer between unofficial debt recovery efforts, especially in the early phases, and extensive legal action. Successful pre-legal debt collection is crucial for companies looking to minimize losses and preserve cash flow.
This article will explain pre-legal debt collections, how they function, and why leveraging them makes sense. It will also identify the key parties involved, the best practices to maximize recovery, and more.
Pre-legal collection is the first phase of debt recovery in which you try to collect past-due amounts using non-legal methods. Usually, it comprises a mix of letters, emails, SMS, and phone conversations. This stage entails communication between your company and debtors to make it easier for them to return unpaid debts. This includes any actions taken in-house by debt collection companies or solicitors acting for your business.
Also Read: Using SMS Templates for Debt Collection: Examples and Strategies
Now, let’s explore why pre-legal debt collection is considered a fruitful alternative to its legal counterpart.
Businesses send pre-legal notifications, which are informal warnings that inform the debtor of their outstanding debt and the possible repercussions of nonpayment. Pre-legal collections benefit your company in several ways. Let’s find out.
The above flowchart showcases key strategic objectives for using pre-legal debt collection methods.
Receiving a pre-legal notification can have a significant psychological effect on debtors. It can lead to feelings of anxiety or fear, often causing them to act more swiftly to avoid further consequences, like getting dragged to court. This, in turn, helps maintain positive cash flow and preserve customer relationships.
Legal fees, court costs, and litigation time can eat into any funds recovered. Pre-legal debt collection techniques let you evaluate the likelihood of using legal means to recover debts. For instance, expensive and time-consuming legal action may not be required if early attempts at debt collection are successful, saving both parties time and money.
Many creditors prefer to preserve business relationships and avoid the public exposure of a legal dispute.
Industry rules like the Fair Debt Collection Practices Act (FDCPA) ensure that companies stay out of trouble legally and safeguard their reputation.
Understanding pre-legal debt collection is incomplete without knowing the key players involved and the common strategies devised to ensure maximum debt recovery. Let’s explore these in the next section.
Before taking a debtor to court, several important parties collaborate to help collect past-due payments during the pre-legal debt collection process. These include creditors, debt purchasers, and debt collection agencies.
They play a vital role in managing communication with debtors. They deliver notifications, arrange installment plans, and try to settle the debt without the need for legal action.
Also Read: Benefits and Cons of Outsourcing Debt Collection Services
They purchase overdue debts from creditors at a discounted rate. These buyers then take full responsibility for collecting the debt. For example, a company may sell off its unpaid invoices to a debt buyer, who then pursues the debtor directly.
Debt buyers typically have a more aggressive approach, using tactics such as offering lump-sum settlements at reduced amounts to recover funds quickly.
Did You Know? How much do debt buyers pay for accounts in such a case? Well, it ranges between as little as 4% and 50% of their face value.
For instance, a debt originally owed at $1,000 may be purchased for anywhere from $40 to $500.
They are the ones who have lent the money. Hence, if the situation arises, they can also participate in pre-legal debt collection efforts.
Example: To address a late invoice, a small business owner may contact the client directly and work out a payment schedule or provide a minor discount in exchange for prompt payment.
After sending the debtor a pre-legal notification, you must understand the potential responses and plan accordingly. Let’s dive in.
Your approach to a debtor’s response should remain consistent and fair, providing clear guidance on the next steps while continuing to encourage repayment outside the legal process. Here’s how a debtor may usually respond.
The diagram represents an overview of the three most common debtor responses to pre-legal notifications and how you, as a creditor, can act accordingly.
After receiving the notification, debtors have two options: they can contact the creditor to work out a payment plan or pay the bill in full. This is the best result for your business since it prevents the need for further escalation.
In other situations, debtors can become defensive or feel overwhelmed by the prospect of legal action. Hence, they may ask for more time or an explanation of their obligations.
From your perspective, remaining professional and providing flexible repayment options and the necessary documentation can often lead to a positive conclusion.
As a creditor, you must also be able to identify when additional legal action is required to ensure that your approach is in line with the debtor's reaction and your company's long-term objectives.
Some debtors can ignore the notice outright or postpone looking into it. This is one of the worst results that will only escalate the situation. In such a case, you must be equipped with the necessary course of action, such as handing over the debt recovery process to third-party collection agencies or taking the legal route.
Did You Know? Courts have resolved more than 70% of debt collection lawsuits with default judgments for the plaintiff, indicating that many people do not respond when sued for a debt.
Pre-legal debt collection is a crucial phase in the debt recovery process. It helps firms like yours address past-due accounts before resorting to extreme legal action by concentrating on communication, negotiation, and compliance rather than pursuing the costly and time-consuming legal process.
While navigating through this complicated process, partnering with a trusted receivables management service like South East Client Services (SECS) can significantly improve debt recovery efforts, prepare you for probable debtor responses, and protect your business’s bottom line and reputation.
Ready to maximize your debt recovery and avoid costly legal battles? Partner with SECS today for expert guidance and efficient collection techniques. Let us help you take control of your receivables and ensure continued cash flow!
