International debt collection guide

Debt collection can seem complicated. It’s full of fancy words, and both companies and lawyers try to make it seem much more complex than it is.‍

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But stress not!

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In this article, we will cover debt collection from A -> Z, and by the end, you will hopefully agree that debt collection is much simpler than it seems.

High-level steps and concepts in debt collection

In this article, we go through debt collection from a global view. The far majority, if not everything, is likely to be the same in your country:

But be aware – many details (think fees you add to a case, rules, timings, licenses needed, actual texts used) are unique per country. However, the big structures are pretty much the same in all countries. That being said, the customs are unique in each country. Example: in some countries, it’s standard custom to go directly to the court (called legal debt collection); in other countries, you typically run a lengthy process before entering the courts (called pre-legal debt collection.

Debt collection comes down to two high-level “steps”. This section will cover these two steps (pre-legal & legal debt collection) and two fundamental concepts (foundation & surveillance).

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Before debt collection, companies typically start with a reminder flow run by themselves. By manually sending reminders to the debtor, you keep reminding them to pay. Unfortunately, sometimes these reminders are not enough – and this is when you need a debt collection agency. A debt collection agency is helping you collect debts when the debtor is simply not paying. Debt collection agencies typically come in two forms: 1) a company with a license to run debt collection and 2) a licensed lawyer.

In debt collection, the two high-level steps are:

1. Pre-legal debt collection – Actions taken before using the courts
2. Legal debt collection – Actions taken after using the courts

Pre-legal debt collection is typically a series of physical letters, e-mails, SMS, and phone calls. Here the debtor is offered to pay the total amount or enter an installment over a period. A debtor might also give a dispute (they disagree on the debt).

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Legal debt collection can be very confusing because, in most countries, it’s two things that are not related:

• Enforcement court (also called ‘payment order’, settlement court, bailiff court, and more). Typically an institution where the collection agency sends your outstanding debt. If the debtor doesn’t react to the communication from the institution, the debtor is ordered to pay
• Claims court (also called the ordinary court, small claims court, and many other things). Used when there is a dispute, and you need a lawyer to handle it

One of the main goals of using legal debt collection is getting a foundation:‍

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Foundation:

In legal debt collection, the goal is to get what is called a ‘foundation’.

Everyone can send you an invoice, but just because someone sends you an invoice doesn’t mean you agree. A ‘foundation’ is when there has been some legal judgment or specific approval from the debtor, and the debt can no longer be disputed.

The typical ways to get a foundation:

• You win a lawsuit
• You send the case to the enforcement court
• The debtor signs an installment agreement
• The debtor signs an acknowledgment of the debt

When you first receive an invoice, it doesn’t have a ‘foundation’. Not having a foundation is not a problem because most invoices are paid. However, when it doesn’t get paid? That’s when you want a foundation.

When you have a foundation, you gain the following benefits:

• The debtor can no longer dispute the debt
• You can use the courts actually to collect the money
• You extend how long time your invoice is valid

However, getting a foundation doesn’t mean you get paid. Sometimes you can get the court to help you collect the debt, but other times the debtor just can’t afford to pay. That’s why we also have a concept called surveillance:‍

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Surveillance – waiting for a debtor to be able to pay

If the debtor hasn’t paid after running both pre-legal and legal debt collection, the case is typically transferred to surveillance at the debt collection agency.

When the case is transferred to surveillance, the following typically happens:

• The company can write off the debt and get tax refunds
• The debt collection agency takes over the “ownership” of the case
• The price of the collection agency changes

During this process, the debt collection keeps contacting the debtor and tries to get paid. This can take years as the debtor might not have money. However, at this point, the case should be written off, meaning any payment is a nice bonus for the company.

Pre-legal debt collection and why it’s used

Why pre-legal debt collection exists

Pre-legal debt collection exists because it’s a much smoother process than if you involve the courts. The courts are typically slow and expensive.

(Important disclaimer: There are some disagreements about if this step makes sense. Lawyers typically dislike this process because they want to use the courts. They often find this process a waste of time. Our take is that pre-legal debt collection is an excellent process because you can solve a lot of cases much faster and without adding additional costs)

The big problem with pre-legal debt collection is you have no legal enforcement:
If a debtor doesn’t want to pay, you can’t force them. If a debtor says, “I disagree with the debt”, you cannot do anything else without going to legal debt collection.

However, the advantages far outpace the disadvantages:

• Running a pre-legal debt collection is free (unlike legal debt collection where you need to pay the courts)
• Pre-legal debt collection is fast. We can send out an e-mail, SMS, or letter today – the courts can easily take 3+ months
• You’ve no risk. You can typically pull back the collection case without any costs. In the legal debt collection, you have to pay a fee to pull back the case

We see pre-legal debt collection as a filter:
The easy cases get paid, complicated ones get a dispute, and the rest you don’t hear from. The result is fewer cases for the legal debt collection proceedings, saving you a lot of money and time.

What happens in pre-legal debt collection

The pre-legal debt collection process typically takes 1-2 months. The following steps usually happen:

• Significant fees will be added to the case (that the debtor has to pay)
• Multiple letters, e-mails, and SMS are sent to the debtor at a high pace
• Multiple phone-calls is are being made to the debtor
• An installment is typically offered so the debtor can pay over multiple months
• The debtor might file a dispute, so you know the debtor disagrees
• The debtor might ask some questions about the debt
• The collection agency will verify all data on the debtor in external data registers
• The debtor might be registered in a credit score system as a bad payor

The above actions typically solve a lot of cases. You can see the pre-legal debt collection as a filter that puts debtors into buckets:
Some pay
Some enter an installment
Some give a dispute
Some you don’t hear from

But it’s a risk-free way to get your debtors sorted into relevant categories.

Disputes and why debt collection only works if the debtor agrees with debt

An important part of the pre-legal debt collection process is getting disputes from the debtor.

A large percentage of unpaid invoices are simply not paid because of the following reasons:

• The debtor disagrees with the debt
• The debtor has a question
• The debtor didn’t receive the invoice in the first place (example: the e-mail bounced, and they first hear about it with the letter that is sent)

It’s extremely important to filter these debtors out. Collection agencies always register this dispute, and then they’re handled. This flow depends a bit on the country, but the default flow for disputes is:

1. Debtor reacts and sends a dispute
2. The collection agency sends a dispute to the creditor (you, as the company)
3. Creditor replies with their view on the case (is the dispute correct and should the case be closed, or is the dispute simply wrong)
4. The collection agency then has the following options:
5. Continue the case (if the dispute is considered ‘non-significant’)
6. Close the case (if the dispute was indeed correct)
7. Add the dispute as a complicated dispute requiring a lawsuit (= legal debt collection)

After running a 1-2 month long pre-legal debt collection process, you’ve placed all your cases in different buckets. Some of these buckets requires help from the legal debt collection:

Legal debt collection and how it can solve your case

While pre-legal debt collection happens before we use the courts, legal debt collection is everything about the courts.

When dealing with the courts, there are a few unfortunate differences VS when you run pre-legal debt collection:

1. You need to pay money up-front. The courts charge money, plus it’s a manual process for the debt collection agency. Multiple manual hours are spent, and this never happens without you paying first
2. The courts are slow. In some countries, the courts can move relatively quickly, but even in the fastest markets, expect over three months of reaction time. It’s not uncommon it takes 6-12 months for anything to start getting resolved

However, legal debt collection IS effective and is a natural follow-up after a pre-legal debt collection flow.

Legal debt collection are two different things

It’s essential to understand that legal debt collection is two types. The names and how they work are unique per country, but most countries have these two things:

Type 1 – The enforcement court:

The enforcement court is used for undisputed debts. This court is where you quickly get a foundation and can force the debtor to pay you. If the debt is disputed, this court cannot be used.

The way the enforcement court typically works is as follows:

1. The lawyer/debt collection agency submits the debt to the court (+ pays the court fee)
2. The court contacts the debtor – typically with a physical letter. Now there are three outcomes:
3. Outcome A – no reaction
4. You now get a foundation, meaning the debt cannot be disputed
5. The court can now help you collect the debt (the actual enforcement depends A LOT on the country – in some countries, it can be automatically paid through debtors salary, others pawning items, and even in some countries, the debtor will be put to prison!)
6. Outcome B – reaction from the debtor to court
7. This is nearly always considered a dispute. This means you need to start a lawsuit (see” Type 2″)
8. Outcome C – debtor pays or enters an installment
9. The most common scenario here is that the debtor either pays the bill or enters an installment

Type 2 – The courts:

This type of legal debt collection are using the “real courts”. You use them in the following scenarios:

1. The debtor gave a serious dispute to the debt
2. The debtor gave a dispute to the enforcement court
3. The debt has a significant size (depends on the country – in some countries, the enforcement court only takes cases up to a given size)

When using the real courts, it means you’re suing the debtor. When you sue someone, there are typically different courts. These different courts can depend on the amount (i.e., a small claim court exist in many countries) and the nature of the debt (i.e., in some markets, there is a specific court for’ home services’).

When suing a debtor, it’s a long process. In addition, the process is unique per country. However, the main flow is:

1. You sue the customer (or your lawyer does it on your behalf)
2. The court will give you a chance to find a solution together to avoid the courts
3. You’re meeting in court
4. A decision is made by the judge

The decision depends entirely on the case. If you win the case, the debtor might be deemed to pay your invoice and your costs to a lawyer. However, the only thing winning a lawsuit does is give you a foundation. A foundation does NOT mean you get paid. However, it means you can go directly to the enforcement court outcome A step 2, where the court can help you collect the debt.

Summary of debt collection

As you can see, debt collection is quite simple! You can either work with lawyers or a debt collection agency (like us) and then the process is straightforward:

For the majority of cases, you start with pre-legal debt collection flow. This puts the debtor into multiple buckets:

• Some pay <– success!
• Some enter an installment <– success!
• Some give a dispute <– legal debt collection (court system)
• Some you don’t hear from <– legal debt collection (enforcement court system)