Most credit managers take the view that legal action for debts below about $5000 is simply not worthwhile. This is usually because of their poor experiences with legal action.

The result is that literally hundreds of millions or even billions of dollars are being written off annually, which are in fact quite collectable.

In this article, I will start from the beginning and describe what an excellent collection system would provide for in terms of legal action.

The first step is to ensure that the information collected from the customer is not only correct in terms of the exact name and the home address but importantly a mobile number and email address along with details of where the customer works.

If the customer is a company, the default position is that directors' guarantees must be obtained. Legal action against individuals will always produce a better outcome than against companies.

Obtaining work information for debt granted to individuals is an essential step to being in a position to sue and successfully recover the debt, as I will get to further on.

Your business must have proper trading terms in place and there must be a clause which provides that in
the event of default, the customer will be liable for all costs incurred by the creditor, including commission, interest and indemnity legal costs.

By having this clause in place, the decision to sue becomes a much easier one because at that stage the commission payable to your collection agency can be added to the claim along with indemnity legal costs. The difference between "indemnity legal costs" and normal "party/party legal costs" granted by the court is usually about 40% more.

Thus, if you have the correct clauses in place, when you sue, you will be adding all legal costs incurred by you. This will significantly bump up the amount of the claim and this alone will increase pressure on the debtor.

When deciding to sue, you need to ensure that you have a correct address for service. However, if you don't but you have a verified work address, it is possible to get an order for substituted service and to serve the documents at work.

A final piece in the jigsaw is to look at the state in which the debtor lives. As the overwhelming percentage of consumer judgments will be enforced by Garnishee of wages, there are certain states which offer better and cheaper processes for this than others.

Unfortunately, South Australia is effectively a no go area for garnishees, whilst New South Wales and ACT provide cheap, quick and effective Garnishee Orders. All other states provide worthwhile processes.

In all states, there will be an additional cost order granted against the debtor to cover the garnishee costs. In our experience, if all of the above boxes have been ticked, then it is commercially worthwhile suing on debts as low as $500.

For company debts which exceed $2,000 and are undisputed, we would not sue but go straight to Statutory Demand. This is quicker, cheaper and more effective.

In order to handle volume legal actions, you need a law firm which specializes in debt collection and
which provides fixed price fully inclusive legal action services for all Australia jurisdictions.

If your policy has been to not sue on consumer debts, I suggest that you set aside ten or twenty files and carry out a test run. The results will not be immediate because garnishee processes tend to invariably involve payments over time but I am confident of an overall recovery of the net debt of 75-80%.

If you do so, you will find that you are advantaged by the fact that most credit managers don't sue. Accordingly, debtors will usually ignore threats because they are aware from experience that the threats made are hollow. It does no harm to you to be seen as being effective and tough in your collections processes. The upside to this is that debtors will know that "they can't mess with you". The result is that next time around, you will get paid in preference to others, who will probably be ignored.

To ensure that you incorporate the correct wording in your trading terms, contact the Prushka Client Services Team on 1800 641 617 or go to www.prushka.com.au and obtain the complete wording, which is provided without charge.

Roger Mendelson is CEO of Prushka Fast Debt Recovery Pty Ltd and is principal of Mendelsons National Debt Collection Lawyers Pty Ltd. Prushka acts for in excess of 53,000 small to medium size businesses across Australia and operates on the basis of NO RECOVERY – NO CHARGE.

The writer is also author of The Ten Mistakes Businesses Make and How to Avoid Them and Business Survival, both published by New Holland Publishers in 2009.

Mendelsons Lawyers Fixed Price Fully Inclusive legal action in all Australian jurisdictions.

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