Litigation & Enforcement
Published Monday 02 April 2007
Clive Pickett, Black Horse Financial ServicesBy Nick Ramsden, Litigation Manager, The Lewis Group
Litigation and Enforcement has often been considered the last resort in debt collection. The apparent cost - both in terms of manpower and capital outlay - has been viewed as a barrier to entry, especially when low-value debts are involved.
However, for the smarter collector and credit manager, Litigation and Enforcement can be a powerful and cost-effective tool, with a very high chance of recovering even the smallest of balances outstanding.
The key to successful use of Litigation and Enforcement is to ensure that you have the right information at your disposal and use it intelligently. This can be the difference between success or failure. Litigation should only be used where appropriate; information will determine which cases should be taken to Litigation, and which should not.
For example, an account where the debtor has the means to pay and assets of value, but clearly no intention of paying (known within the industry as the 'won't pays') is worth taking to court. Conversely, those without the means or any assets (ie the 'can't pays') could end up costing you dearly. In short, there is little point in throwing good money after bad, as Clive Pickett, Head of Collections for the Asset Finance Division of Black Horse Financial Services confirms:
"There is little to be achieved by suing the straw man, and no point in wasting a finite resource," he says. "As a last resort for recovery, and in the right circumstances, litigation can be extremely effective. Often, the receipt of a letter by the debtor to say that we are going to sue is sometimes enough; indeed amongst the 'won't pays', many of them will not pay until this point is reached. I would consider litigation an essential tool as part of a wider collection operation."
The lesson therefore is to be highly selective before making your decision and to work closely with your collection agency in making the decision, to select those accounts with a real chance of success.
The accumulated information at hand needs to be gathered and used smartly. Basic details - addresses, employment history, previous payments made etc - should be checked and confirmed. More importantly perhaps, if the account has any outstanding disputes then these need to be resolved prior to any court action, or the consequences could be costly otherwise. Accuracy is the watchword.
"We need to ensure that all customers are treated fairly, and in a manner that is wholly appropriate. We need to give them every opportunity to pay before suing, and need to demonstrate we have done this to the courts," Clive adds.
If your selection criteria is good, the case will more often than not go uncontested and the Court will issue an Order for payment. (If The Lewis Group is taken as a benchmark, more than 98% of its cases go unchallenged). At this point, assuming your debtor still refuses tot co-operate, the method of Enforcement needs to be determined.
Most frequently the first line of Enforcement starts with the Bailiff. An example of the importance of using good quality information to aid the decision process is clearly illustrated by statistics produced by the Court Service which show that almost half of all warrants issued are unenforceable, mainly because the debtor is not at the address. At a cost of up to £55 per instruction (£95 if for return of goods), this can be an expensive exercise for the creditor. However, this route is particularly effective in recovering monies where the debtor has the means but not the inclination to pay. Where a debtor is found to be at the address, around 80% of warrants result in payment, or the recovery of assets.
Another option of Enforcement is an attachment of earnings, where payments are effectively deducted at source, via the debtor's pay-packet. Of course such an action is only relevant where the individual is in regular employment, but is extremely effective.
A further route is to take a Charge on the debtor's property (or other assets). This is useful in that it secures the debt on the equity of the property, such that if that property is subsequently sold, or re-mortgaged then the money owing is immediately recovered. The thought of a charge on the property as far as the debtor is concerned can also focus the mind toward commencing payments.
Clive Pickett will consider all options, and sometimes a mix: "Once all of our core collections procedures have been exhausted, then we will consider suing," he says, "but again only if we think we have a better than 95% chance of recovery. We will look at the profile of the debtor, whether he is employed, owns a property, and assess the chances of recovery. We will then consider whether we opt for a long-term payment, an attachment to earnings, or a charging order – whatever we consider will be the most effective."
Again the key is in assessing each account individually and making a judgement on the most appropriate course of action to pursue. It is important to weigh the cost of the procedure against the value of the debt to be recovered. (The key driver for Clive, for example, is to litigate for return of goods.) On that basis, it is unlikely, for example, to take a charge on a property - such are the costs involved - for debts of less than £1,000.
But Selective Litigation and Enforcement as a credit management tool per se can be used for debts as low as £25 (and can serve as a useful wake-up call for the habitual debtor), so its appropriateness spans a broad spectrum of debt.
Despite its benefits, Litigation remains one of the most under-used weapons in the credit manager's armoury. Steadily, however, this is beginning to change. The court service has, over the last few years, streamlined many cumbersome enforcement procedures, and continues to do so, which is yet another attraction to the discerning credit manager.
The current overhaul of enforcement provisions including further procedural changes may well serve to accelerate its popularity. Debt outsourced for straight Litigation-only type collection is a growing market, and looks set to continue.