Gaze Burt’s clients frequently complain about being owed small or medium sized debts. We are experienced in practical debt recovery options, and we take the size of the debt into consideration when determining strategies. The Courts have a variety of remedies available to creditors but only some of these can cost effectively recover smaller debts. This article discusses the process of recovering a smaller debt while keeping costs to a minimum.
STEP 1 – FINAL DEMAND AND NEGOTIATIONS
We recommend the first step in the debt recovery process to be a final letter of demand on our letterhead. Regardless of how many letters of demand and telephone calls have been made to the debtor by you before bringing the matter to us, a lawyer’s letter can be a highly effective motivation to pay the debt, or perhaps to enter into settlement negotiations for a lesser sum if the full amount genuinely cannot be paid.
Letters of demand have varying levels of success. Where your debtor lacks the funds to pay the debt we would not always expect a response. However, if the debtor has the ability to pay (if only by instalments over time) or for some reason disputes owing the debt, this is the point when we would expect to receive a flustered or indignant telephone call (or a letter from their lawyer).
Letters of demand can be a quick and cheap way to open lines of communication with debtors, which is essential if there is to be any form of settlement. If you are willing to consider settlement for a lesser sum or settlement on more lenient terms we are also available to negotiate on your behalf.
At the settlement stage we can also take steps to safeguard you against future risk. One effective approach is to make settlement on preferable terms conditional on the debtor admitting the whole of the debt in writing. We would provide an undertaking to hold this admission and not to use it unless the settlement is defaulted upon. If the debtor then defaults we can use their admission to obtain judgment against your debtor for the whole sum without needing a hearing. This may be enough of an incentive to the debtor to make their settlement payments to you a priority.
STEP 2 - LEGAL PROCEEDINGS
Regrettably many debtors do not respond to letters of demand, usually because they have either no intention to pay the debt or little means to do so. Once you are satisfied that the debtor does not intend to willingly pay the debt, you are at the stage of deciding what further legal steps you would like to take.
In the case of very small debts (under $1,000) or debts of under $5,000, very careful consideration will have to be given to the potential cost of further legal fees. We would discuss this with you to ensure that you are kept fully informed about potential costs. In the event that you wish to proceed and file proceedings to recover the debt, you have several options. These are:
(a) The Disputes Tribunal
This is at all times the preferred option if proceedings are necessary. It is quick, cheap, and accessible to people who are not legally trained. The downside of the Disputes Tribunal is that it will only allow itself to be involved in genuine disputes. It does not consider itself to be a collection agency and if a person does not dispute the debt or simply has taken no steps in relation to that debt the Tribunal will not be interested. In that case it would be necessary to go to the District Court instead. The Disputes Tribunal is also a less technical jurisdiction, so it is harder to predict the outcomes of cases, and defences that sound good (while perhaps not having substantive legal foundation) may be accepted. This is less of a problem where the case is relatively simple as most debt collection cases are likely to be.
A Disputes Tribunal case is initiated by filing a simple application form giving the parties details and setting out the nature of the dispute. Any relevant documents are attached at this stage.
Once the application has been filed the Tribunal will set a date for hearing the matter and the other side will have an opportunity to file a defence. On the day the Tribunal member will have the opportunity to hear from each side in the manner they see fit and will then make a decision.
The Disputes Tribunal’s jurisdiction extends to debts of up to $20,000 by the consent of both parties. Under $15,000 no consent is needed. The jurisdiction was increased recently, so now a greater proportion of small debt collection matters can be heard cheaply by the Tribunal.
Disputes Tribunal awards can be registered in and enforced by District Court proceedings as if they were an ordinary Judgment.
(b) Ordinary proceedings
Ordinary proceedings are the usual form of court action. We would arrange for your claim to be filed in Court and would have this served on the defendant. The defendant then has 30 working days to file a response.
The real benefit of ordinary proceedings is that if the defendant fails to file their response within the 30 working day time period you are entitled to obtain judgment by default. The value of this is that no Court appearances are necessary, and only a minimum of documents need to be filed. It is a constant source of pleasant surprise to us that many debtors do not file responses and our clients are able to obtain judgment by default on a regular basis.
If judgment by default can be obtained it is the cheapest and quickest way of obtaining judgment against a debtor, and is therefore highly recommended for smaller debts. However, there is one risk: if the debtor files even a simple response using the Court’s standard forms readily available for this purpose, judgment by default will be unavailable. Regardless, a great many debtors do not even take this easy step.
Where the debtor does file a defence the parties start the “information capsule” stage of proceedings. This is where the plaintiff send the defendant a bundle of documents, including one page witness statements, a questionnaire about the relevant issues and points of dispute, and a list of all the documents they intend to rely on to prove their case. The plaintiff must serve their capsule within 30 working days after receiving the defendant’s response. Within 30 working days after receiving the plaintiff’s capsule, the defendant must serve their capsule. If the plaintiff is late, the claim is struck out and must be refilled. If the defendant is late the plaintiff can get default judgment.
Once this stage is complete the plaintiff chooses whether to proceed. If so a further fee is payable and the matter goes before a registrar, usually for allocation to a Judicial Settlement Conference. The JSC is a mandatory step in almost all proceedings, unless they are exceptionally simple.
This is a mediation conducted between the parties and their lawyers, facilitated by a Judge. The benefit of this is firstly in the Judge’s expertise to mediate between the parties, and secondly that the Judge is uniquely positioned to encourage settlement. This might be done by privately pointing out any obvious defects in one party’s case, or by ramming home the realities of costs and delay if agreement could not be reached and the matter needed to proceed. This step often provides a wake up call that revitalises prospects of settlement and makes it clear to the parties that their best interests probably lie in an agreed outcome. If agreement can be reached the Judge can make orders so that the agreement is enforceable. Sometimes an admission of liability will be prepared as a condition of settlement.
If there is no settlement, the matter proceeds to trial.
Judgment
Once judgment is obtained (either through summary judgment, default judgment, or otherwise) this may be enough to motivate payment of the debt. This is particularly so in the case of
bona-fide Debtors who were simply stalling or in denial, or inexperienced debtors who may be intimidated by the Court’s involvement. Regrettably, debtors who have no means to pay or who stubbornly refuse to honour their obligations must be compelled to pay the judgment. This is where the enforcement step comes into effect.
STEP 3 - ENFORCEMENT
In many cases the primary means of enforcement used is bankruptcy (where the debtor is an individual) or liquidation (where it is a company). In small or even medium sized debts these remedies are often too costly, compared to likely prospects of recovery. The first reason is that the judgment debt is paid from the debtors assets, and if they have none there is little prospect of sizeable recovery. The second problem is that the liquidator for the official assignee will not treat any one unsecured creditor differently (with some exceptions including IRD & staff owed wages). You can go through the liquidation process only to find that the debtor has creditors all over town, and everyone gets the same few cents on the dollar.
Given these problems we only recommend bankruptcy or liquidation in cases where you can point to specific, substantial and unencumbered assets owned by the debtor, or where you are not especially concerned about costs (perhaps where the debt is a matter of principle, or an example to others). Where medium sized debts are concerned it is worth making a case by case assessment of the merits of bankruptcy and liquidation.
There are a range of other cheaper and potentially more effective methods of enforcement available. We recommend examination of the judgment debtor, a distress warrant, an attachment order, or a charging order.
Examination
Examination of the debtor is where the Court orders the attendance of the debtor to an interview in Court under oath, where they are asked questions about their financial circumstances to determine whether or not they can pay the debt. They are required to bring any necessary documents to illustrate their financial position. Once their finances are known, the registrar who conducts the interview is entitled to make an order for payment in appropriate weekly amounts (or such other arrangements as are appropriate). If the directions are breached you are entitled to make an application that the debtor undergo community work for contempt of court (up to 200 hours). This can be a very effective threat against ensure payment.
Distress Warrant
A distress warrant is legalese for where a bailiff enters the debtor’s property, seizes items of value, and sells them to pay the debt. The bailiff also has the option of immobilising motor vehicles rather than seizing them if the circumstances make this a convenient option. We recommend a distress warrant where specific identifiable assets are available and can be targeted. Problems arise where the seized goods may have other claims against them, for instance by a finance company.
Attachment/Garnishee Orders
This is when money is claimed from the debtor via their employer. The Court can make an order against the employer that a certain proportion of the debtor’s income is to be transferred to you out of their pay packet. The upsides of this are obvious, as you do not rely on the debtor to make payment. However, there are a few hurdles to overcome before this remedy is available. Firstly, the debtor must be employed. If they are unemployed or self-employed the remedy will be ineffective. Secondly, you need to know enough about the debtor to establish who their employer is in order to make the application. Finally, the attachment order is not a quick way to receive payment of debts. The attached sum is unlikely to be very large (depending on the size of the debtor’s income).
Charging Order
The final enforcement technique we recommend for small/medium debts is a charging order against a bank account. This is only useful where you have information about the debtor’s finances, such as the identity of a trustee who holds money that the debtor is beneficially entitled to, or the debtor’s bank and account number. Direct deposit, payroll, and credit application information may be useful here.
Nothing says ‘pay me’ quite like having a complete freeze put on someone’s bank account. The orders would specify that the person holding the money (usually a bank) is forbidden from paying money out of the frozen account except to you, until the debt is cleared. It they breach the order then the third party becomes liable to you for the sum. This is especially effective where the debtor requires access to the fund, for instance where it is a trading account.
CONCLUSIONS
Keeping an eye on costs, avoiding options that (while they may be effective) are prohibitively expensive, and making careful decisions based on the circumstances will ensure that recovery is made cost-effectively, and impossible debts are identified early and written off with a minimum of further expense.Collecting a debt can be a daunting prospect and there is an inherent risk that it may not be cost effective (especially where the debtor has no means to pay). However we have encountered a wide variety of successes in this field – everything from debtors changing their tune after a simple letter of demand and a stern telephone call, to successful out of Court settlement negotiations, and successful Judicial Settlement Conference outcomes.
