The Three Keys to Debt Collection (and 5 other keys which you probably ignore)

Broadly speaking, the three keys to debts collections are: 1) Processes 2) Experience and 3) Professionals.

In the Game of Thrones, the Lannisters are known to always pay their debts; unfortunately, in the real world is not always the case. In fact, particularly in B2B companies, commercial debts are one of the main causes of companies’ bankruptcies. And, defaults on payments affect just as much to big companies as to small and medium-sized enterprises

or to micro-companies and freelancers. And although certainly financial crisis increases the frequency of defaults, good times of economy would not eradicate them either.

Jorge Manrique wrote a verse about death five centuries ago that could perfectly apply to defaulted payments: “And those who live by their hands and the rich are the same.”

Therefore, regardless of whether your company was in one category or another, this article will be of interest to you. Because we are going to deal with how to proceed with debt collection at Court in this article. What “weapons” to we could employ and what can we expect from our opposition.

We will not go to chapter III of the Spanish Civil Code, which regulates “Obligations and Contracts”. What we are going to do, instead, is expose some of the conclusions we have drawn after more than 10,000 claims of default payment. They are individualized cases, from all different sectors and with preeminence of B2B businesses.

These cases were consisted of hundreds of lawsuits, thousands of writings and tens of thousands of hours in courts all throughout Spain. We have learned from many victories and some painful defeats.

Some of which, we will share with you right now, the rest we are reserving for our clients:

1) Time is of the essence, that is, the time-term is essential.

And, we are not talking about suing before the statute of limitations is due, but to however, act with immediacy. And this for several reasons:

• If the debt is recent it means that the commercial activity is also. Meaning that the company is still up and running, which is in the market. It results are always better when one tries to collect from an active debtor. Because they have something to lose and something to protect,
• because, except for rare exceptions, the debtors do not have a one single creditor as well as, they tend to be going through serious difficulties and they have to default as a method of financing, or for any other reason. A debtor usually has several debts and several creditors, and all their creditors will compete to be collect their debts from the same assets. And as it happens in the African Savannah, a lion differs from a hyena at the time of eating.

2) Your market must know that your company is No Flexible when it comes to collecting debts.

As we said in point 1, debtors usually have more than one creditor. And in the struggle of keeping the company in good shape or being the favored victims, the court will to pay off who they consider weaker.

And, usually, there should be only two variables that influence our decision, need and fear. The need, i.e. the services or products that we commercialize are essential for the continuity of a debtor’s company and is not a parameter that we could control. Sometimes our products or services would be essential for the “possible” debtor. On other occasions, given that we compete in a huge and global market, we would be one of the many suppliers.

The second variable is fear and this variable is, however, in our power to control. It is important because the debtors, feel more inclined to pay the stronger creditors among them all. And for the record, we’re not talking about intimidation, meaning not to hire an operator that calls the debtors hundreds of times.

No, what we say is that your clients must know they will be sued if they think about default on their payments and if they fail to meet the payment. That they will be sued under all circumstances. That they will be sued, even if there is no guarantee of recovery. That they will be sued, even if they are lifelong clients. This is nothing personal, but that’s how your company works. Any negotiations and agreements are not affected, of course, but with these conditions already presented.

Why? Well, because your market can tell if the usual threat of a debt collection letter and a phone call would be real or not. And if they know about the validity of a threat, not paying you would be an acquired and continuous strategy of the firm. In the short term threatening without demanding can result in something, in the medium term these results would disappear. And in the long term, the infinite debt collection letters and the repetitive calls are tremendously counterproductive.

Therefore, it is essential to achieve a reputation of a strong standpoint in front of clients. Even though sometimes it seems like it looks contradictory to the company’s economic welfare. Because suing only when you have the absolute certainty of collecting debts can lead our debtors deciding more often to pay someone else than us.

3) Avoid the contracting general conditions

This is one of those tips that is easier to give than to implement, but of growing importance lately. General contract conditions, listed below, have been an essential element on large-scale contracting, including B2B businesses. And, when the amount of the contracting is small, it may still make sense to use them. However, there are certain relevant contracts that would be counterproductive to operate under these general conditions.

The general conditions (i) are regulated in a specific and strict manner (ii) they usually predispose the judge against the company that uses them, (iii) they are reviewable ex officio (iv) they are more and more often canceled for its abusive or incompressible nature (v) they make the forum selection clause useless, forcing us to sue in the domicile of the defendant.

Therefore, it is important that the company assesses the economic limit for the inclusion of the general conditions of contracting. And always and in any case make sure that they are legible (large print size) and understandable.

4) Consider the procedural options at your disposal.

In many cases, lawyers tend to initiate, without exception, the claims to payment with the filing of a small-claim. Its advantages are known to all, it is faster, more cost efficient, and can reach your goal faster too: execution and seizure.

Small-claim proceedings are like rolling a 6 in Parcheesi, is the perfect option until it had been rolled 3 times and forces you to send a pawn home. Because, when it is foreseeable that there will be an opposition, t<he small-claim court should never be the chosen option.

And you might think, but it is often not predictable, right? Yes, sometimes we cannot anticipate, but many other times we could. For this reason, small-claim proceedings should never be the chosen option when (i) we are facing a debtor who has protested the service and from whom we can expect an opposition (ii) we are facing a professional “debtor” in dragging out answers or (iii) we have to sue in a town with a lot of judicial delaying. In these cases, going to the verbal or ordinary proceeding, which would save time and money.

5) Know the most common excuses of debtors facing a claim and prepare in advance how to refute them.

The causes of opposition to payment claims are not assessed, contrary to what happens in foreign-exchange. In theory, the type of answers we receive could be infinite leaving aside the procedural exceptions. However, 10,000 legal proceedings show us that, in B2B complaints, 90% of the oppositions are coincidental. And they are based on some of these arguments or a combination of them:

• No contract in place. Mainly alleged, when- beside the invoices- there is no more documentation accrediting the service or the purchase-sale.
• Failure to sending invoices
• Incorrect, excessive, or non-consensual billing
• Exception of a contract that has not been fulfilled or has been fulfilled in a defective manner (Non adimpleti contratus, non rite adimpleti contratus)
• Inapplicability of the general conditions.

That is why it is fundamental that your lawyer knows your business, because he or she is your voice in the Court. As Sun Tzu said in the Art of War, ” If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.”