If you are business owner looking to get help with your overdue invoices, then it’s a good idea to understand the difference between a debt collection agency and a law firm.
The world of unpaid debt and knowing who to involve in the debt recovery journey can be a daunting concept for many business owners.
Debt collection agencies and law firms each serve different purposes along the debt recovery continuum and they can both be complimentary to one another when engaged at the right stage in the collection process.
Debt collection agencies
For many businesses managing overdue debt, collection agencies are a logical first step in the debt recovery journey.
Debt collectors will:
- write to your debtor seeking immediate payment of your overdue debt;
- undergo lengthy negotiations with your debtors; and
- guide you on the commerciality of next steps and whether legal action is required.
It’s important to note that whilst collection agencies are experts at negotiating commercial outcomes with difficult debtors, if they are unsuccessful the matter will likely need to progress to a law firm so that a statutory demand can be issued, or a statement of claim can be filed in Court against the debtor in order to enforce the debt owing.
Costs: Fortunately, debt collection agencies will typically only charge Contingent Fees which means they will only get paid if they are successful with recovering the unpaid debt. The fee charged by collection agencies will vary depending on the size and complexity of the amount owing but will usually be a percentage (usually being 10%-20%) of the total amount recovered.
If you would like to learn more about the debt collection process, we would encourage you to visit the Australian Competition & Consumer Commission (ACCC) website.
Law Firms
A law firm is typically engaged after all final attempts have been made by a debt collection agency to recover the unpaid debt. Engaging a law firm should only be considered after all prior attempts to resolve the unpaid debt have failed.
A lawyer will take the legal steps necessary to bring the debtor to account and this will involve:
1. issuing a statutory demand which is a formal, legal step requiring the debtor to pay the outstanding debt within 21 days; or
2. if the statutory demand is disputed by the debtor, a lawyer will assist in preparing a statement of claim and filing it in Court, against the debtor.
Typically, a lawyer will have the unpaid debt recognised by way of an expired statutory demand or a Court judgement. Following which, if the debtor still fails to make payment on the unpaid debt, you will be able to apply to have the customer wound up and placed into liquidation.
Remember: When deciding whether to take legal action and commence legal proceedings, creditors should always assess the commerciality of the claim, and the costs involving in commencing legal proceedings. It is important for all parties to take a commercial and pragmatic approach to resolving disputes when they end up with lawyers.
If you find yourself in the position of needing to engage a lawyer to progress the unpaid debts, always consider the commerciality of bringing a claim against the debtor, including what their financial capacity might be to pay the debt even if you are successful with a Court judgement. Sometimes, the best outcomes can be negotiated without needing to go through the Court process but are still facilitated through lawyers.
Costs: Law firms will typically offer Fixed Fees or Fee Estimates to undertake debt recovery action. These fees are usually paid upfront to the law firm and will be payable irrespective of a successful outcome.
The cost of engaging a law firm will range significantly depending on what is required to progress the matter through the Courts.
Key Takeaways
If you are considering engaging a Collection Partner to assist you with unpaid debts, it’s always important to consider your needs and risk appetite before proceeding with either a debt collection agency or a law firm.
If you are uncertain about your options, please get in contact with us here and we will be happy to help.
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