Credit managers and not just those employed by lending organisations are responsible for debt recovery from customers who have failed to pay up their debt. This is a task that requires great sensitivity and emotional intelligence, as credit managers are often exposed to underlying human emotions and personal difficulties the debtor may be experiencing during debt recovery. When all attempts to recover the debt fail, litigation is commonly used as a final resort. While litigation is one solution to deal with recovering debt, many credit managers will agree that it is often not the best, citing the following reasons:
1. Litigation is expensive
Litigation is an expensive process both for the credit lending organisation and the debtor who may choose to appear in court to defend their case or delay the collection of the debt. There are court fees to be considered apart from hefty legal fees that need to be paid to lawyers by both parties to comply with the process.
2. It is time consuming and long
Litigation is a time consuming process wherein, once the case is filed, you need to wait for court availability for the hearing to start. The hearing is unlikely to conclude in a single session, in which case, additional court appointments need to be taken. Depending on the complexity, a case can drag on for months before a trial is reached. The value of recovering the debt today is reduced by the delay taken in court.
3. Both parties walk away dissatisfied
During litigation, lawyers representing both sides present and contest evidence and facts from which the court delivers a judgement. Often, neither party feels they have had a say or been heard properly. Once delivered, a judgement would often leave both parties feeling dissatisfied. There is no guarantee that either party gets the result they want going into litigation and by delegating the outcome to the magistrate or judge, risk the outcome they would even be prepared to settle for.
4. Litigation is not always successful in recovering the full debt
By going to court, there is no option for the debtor to work with the creditor to draw a feasible payment plan. Rather, the limited solutions of debt recovery delivered by the court is what both debtor and credit manager will have to accept. As mentioned earlier, neither party gets a say in the judgement delivered which also means that there is no guarantee for the credit manager that the debt will be recovered in full.
5. Litigation discourages confidence in the credit organisation
When credit managers resort to litigation, it will damage on-going relationships and may harm the company's reputation and discourage prospective customers from wanting to deal with the business. Potential customers may lack the confidence to work with the company and be concerned about the hard-nosed attitude to debt recovery and fear the possibility of a lawsuit being filed against them if they default on any payments for any reason. Such unfavourable perception toward the company is certainly not helpful for future business relationships nor an ideal image to have within the industry.
What is mediation and what makes it a good alternative to litigation for debt recovery?
Mediation is a voluntary, alternative form of dispute resolution and facilitated discussion where people in conflict come together in a safe and fair environment to try and settle disputes with the support of an independent third party – the mediator. So instead of going to court and awaiting an outcome that you cannot determine, going for a mediation session could prove more effective and satisfactory. By bringing in a third party mediator who acts as a neutral party and sole purpose is to help both sides work toward resolution, mediation enables negotiation of solutions toward a joint agreement.
As compared to litigation, mediation has the following advantages:
- It is more cost effective than litigation, since both parties share the cost of mediation benefiting the business and the debtor. It also allows for quicker resolution of cases, which helps in cutting down on the legal costs and maximises the value of the debt being recovered as quickly as possible.
- It is quick and easy to arrange, all to your convenience. Only one party needs to contact the mediator and the mediation session can be held at the earliest date when both the parties are available. This is unlike litigation where a date will be given based on court availability and both parties will have to make themselves available at that date.
- Mediation is less intimidating compared to litigation since it is held at a time and place that both parties find convenient and have agreed on. The mediation environment also offers privacy that makes both sides feel comfortable thus facilitating easy and open discussions.
- Mediation is also a completely confidential process, which protects the reputation of the debtor as well as the credit manager and the organisation. Going for mediation will help prevent the case from going public which can be harmful for everyone.
- In a joint session, both parties will be given the opportunity to share their perspective about the issue and express how it affects them. This builds compassion and empathy as both sides gain a greater understanding of the situation from the perspective of the other. This encourages a willingness to cooperate in order to seek a satisfactory outcome for both the business and the debtor.
- The biggest advantage mediation has is it can allow for creative solutions as opposed to going to court where a judgement is passed on the case and leaves little room for negotiation. Through mediation, it is possible to work out feasible payment plans that do not overburden the debtor while ensuring that the credit organisations get the owed amount back with agreed default provisions that can be made enforceable. Both credit managers and debtors are free to discuss and choose an outcome that is best suited to their interests. This ensures both sides walk away feeling heard and satisfied with the outcome.
- Building on the fact that mediation enables creative solutions, it also gives more power to both parties to control the topics for discussion and the flow of the conversation. They get equal chance to present their point of view, express their expectations and constraints and work with the other side to arrive at an agreeable solution that best meets their needs and expectations.
- Bringing about a mutually satisfactory outcome by going for mediation also helps preserve current business relations between the creditor and debtor. Litigation on the other hand usually results in strained relations that ruin any chance of future business transactions between the two parties.
7 Tips for credit managers to maximise debt recovery with mediation:
1. Include a mediation clause in all contracts, terms and conditions as the primary dispute resolution process.
2. Approach the debtor and put forth the idea of going for mediation first instead of sending them a legal notice. This shows sincerity on your end in working toward the issues and establishes trust, encouraging greater chances of a quicker payment and settlement.
3. If you do not wish to initiate mediation yourself or find that the client is uncooperative, approach a mediation agency, such as SHAW Mediation, who can talk to debtors and invite them to participate in mediation. This will help disabuse them of any misconceived or misunderstanding about the mediation process and assist in answering any questions they may have.
4. Meet with the mediator prior to the mediation session to explain your situation and discuss any concerns and potential barriers to the settlement. The mediator will not proceed with any joint mediation sessions until everyone is in the right mindset to proceed.
5. Collate all relevant documentation prior to meeting the mediator to discuss what information and documentation might be needed to ensure a smooth process.
6. Be willing to generate and explore options with the debtor as this improves your chances to recover the debt without having to resort to litigation. You would want to keep in mind that if the case moves to litigation, you might receive a judgement in recovering the debt where the order is only as good as the debtor being able to meet it.
7. The final outcome of mediation is a mutually agreed upon solution that can be legally binding, if you wish. This protects your interests by allowing you to take legal action if the debtor defaults on the agreement. However, if the debt is paid, you may not need to go to the expense of legally formalising a past event by way of a Deed.
Overall, mediation is a quick, effective, flexible and cost-efficient solution that could assist credit managers in debt recovery. It provides for a win-win solution between both debtor and creditor all the while preserving business relations. This ultimately adds to the good reputation of the credit company and builds faith among potential customers.
This article was originally written by SHAW Mediation, a national mediation firm comprising of nationally accredited mediators whose services span across Australia. At SHAW, we can help you to resolve all kinds of disputes – no matter whether the dispute is personal or commercial, and across all ages, genders and industries. Let's talk!