Contracts: How They Help Recover Debts

The use of good, clear contracts is an important and well established business practice. Not only do they establish and regulate business relationships, but they are also extremely useful in the debt recovery process.

Avoid Bad Debtors         

The single most important piece of advice regarding the recovery of debts is to take all reasonable steps to avoid debtors who are unlikely to repay. And in this sense, solid contracts play an instrumental role, particularly as a filter.

The very existence of a contract can be enough to scare off a bad debtor. It establishes a concrete commitment on their behalf, which many businesses or individuals will not undertake unless confident of their ability to pay, even when they would readily enter into a more informal arrangement.

Be wary of any clients who are reluctant to sign a contract, as this is a sure warning sign of a problematic debtor.

Data Collection

Collecting your debtor’s details is one of the most useful precautions you can take, and a good contract should stipulate that they provide all necessary information.

Not only does this present you with an opportunity to determine your debtor’s credibility by verifying these details and running a credit check, but it may also be useful if problems arise in future. For example, if your debtor suddenly becomes unreachable and appears to have “disappeared,” these details make tracking them down a much easier process.

Clarity

In many cases, debts arise primarily due to misunderstandings over what’s owed and when. Contracts can mitigate this risk by clearly laying out the amounts involved and a timescale for payment. The effects of this are twofold:

  • Less likelihood of problems with repayment.
  • Less likelihood of disputes over the nature of the debt. 

Reference Point

Even if you take the most stringent of precautions, there is no 100% guarantee your debtor will repay in a timely manner. Circumstances change, and you may yet find yourself chasing a debt. In doing so, a clear contract provides a useful reference point.

Essentially, the process of debt recovery is based on continuous contact with debtors. You must send regular emails and letters and make phone calls to remind debtors of their obligations and discuss the manner of repayment. With a contract in place, this forms the basis of all future discussion, and you can refer back to it to reinforce your rights as a creditor.  

Legal Disputes

Although it’s better to avoid the courts as much as possible when trying to recover debts, there are times when legal action is the best recourse, and a solid contract is essential should any legal dispute arise.

If your take your debtor to court over a debt, the onus is on you to prove its existence. And if your debtor disputes your claim, a contract may be instrumental in securing a verdict in your favour. Without one, you may have no access to any legal remedy whatsoever. 

The Importance of Contracts

Clear contracts help to avoid bad debtors and increase the likelihood of repayment should any problems arise. Before allowing anyone to become your debtor, make sure you have a solid contract in place. However, should you experience any problems with a debtor, get in touch with us to take charge of the recovery process, as we can help to achieve the best results.