The Cost of Debt Collection
Collecting on any debt may cost you more than the value of the debt itself. Many creditors learn this the hard way, when they are already halfway through the debt collection process and faced with the costs of litigation before a cent has been recovered. The unfortunate reality of debt collection is that, depending on the course of events, it may dip into your pockets and require certain upfront payments, which could be recouped once monies are recovered.
If this is the case, should you even consider going the debt collection route? What guarantee is there that you can afford it and, more importantly, that you will recover the costs? Is it worth the risk? These are important questions to consider and to discuss with a legal professional.
The debt collection process normally starts off with several phone calls requesting payment or negotiating payments terms. If unfruitful, this is followed by a letter of demand. The debtor may at this stage settle the outstanding amount in full or agree to sign an Acknowledgement of Debt and repay the debt in instalments as agreed upon between the parties. This is the least expensive part of the debt collection process. If successful, in terms of a debt collection fee, you can expect to pay a percentage of the monies recovered.
Should the matter proceed to litigation and a summons has to be issued, your costs will normally include disbursements such as printing of the summons, travelling costs and sheriff fees. Again, a percentage of any monies recovered at this stage is normally due as part of the debt collection fee.
The litigation process can be time-consuming. When considering your options, it is important to factor in the waiting period that may occur before the debt is recovered. Will this waiting period cause you to incur further costs?
An example of this is the waiting period that accompanies a Rent Interdict Summons. With this type of summons, a tenant who fails to pay rent is prohibited from removing any of their possessions from the rental property until such time as the matter is adjudicated by the court. However, a Rent Interdict Summons also prohibits the landlord from removing the attached goods from the property. On the upside, this summons gives the landlord a form of security as the attached goods may later be sold in execution to recover monies owed. The downside is that, since the tenant’s possessions cannot be removed from the property, that rental property cannot be rented out to anyone else until judgment has been granted by the court.
Another consideration in respect of litigation dealing with rental arrears is the costs involved in applying for a Section 32 Order. This court order authorises the sheriff to not only attach, but to remove the attached goods from the property. These goods are then stored by the sheriff, to be sold in execution should the court rule in the applicant’s favour. Important costs to consider with a Section 32 Order include the cost of removing the goods from the rental property, the storage fees charged by the sheriff as well as the cost of having the goods auctioned by the sheriff.
It is possible to request at the start of the litigation process that all of these costs be covered by the debtor. This would be included in the summons and in any court application thereafter. Ideally, these costs would either be recouped directly from the debtor or from the sale of goods at auction.
Here are additional points to discuss with a legal professional when considering your debt collection options:
(a) Depending on the circumstances, the court may only allow the recovery of certain costs. For this reason, it is important to begin the debt collection process with realistic expectations and with some money set aside for costs that may not be recouped from the debtor.
(b) If the attached goods are sold at auction, it will be at a value less than their worth. If an attached item, such as a car, is still under payment, the creditor/bank will be paid first. The sheriff will also take a percentage of the auction proceeds. These factors all affect the total debt recovered.
(c) Different companies have different fee structures for debt collection. Generally, a percentage of the recovered debt is due to the legal professional in lieu of litigation fees. Standard litigation fees would normally exceed this amount and if no monies are recovered, no payment is due for debt collection, except for the cost of disbursements. In this way, the legal professional often shares the risk of debt collection with you.
It is possible to collect on a debt without it costing you more than you bargained for. To achieve this, discuss your options with a professional, consider the potential costs and waiting periods, weigh up all of your options and be aware of the risks involved. With the right information, realistic expectations and expert assistance, successful debt recovery is achievable.