Debt Recovery Letter
In the Indian business, ecosystem transactions are majorly done on a credit basis. Entrepreneurs have to face several issues of non-payment to their suppliers, delayed payment of wages, non-clearance of bank loans and all such happen due to receipt of late payments from debtors/customers.
Some debtors intentionally delay in payment to their creditors by giving different annoying reasons. While there are also some debtors who keep their payment policies stringent and clear. In some cases, entrepreneurs also have to take regular follow-up of business debtors for payments.
There is minimal support on the part of the government for delayed and non-payment issues to the entrepreneurial working in unorganized and SME sectors. Most of the debt recovery problems arise in the unorganized sector where entrepreneurs account for cash transactions and are unable to suffice a proof of their transaction. In such cases, they are left unhealed by legal norms.
Irritated by putting regular reminders to non-paying debtors, entrepreneurs are only left with the last option to file a legal suit against them for default in payment through a legal agency. But even the law prescribes that before initiating a legal proceeding, a last call for the payment is to be made to the debtor by sending them a debt recovery letter.
The below write up will guide you “How Debt Recovery Letters work in default debt cases” that are defaulting.
Debt Recovery Letter
A Debt recovery letter is a formal communication/note sent to a debtor defaulting/delaying payment, for specifically asking him for or a particular timeline for payment of the debts owed by him or to notify him about the legal consequences which one shall have to face if the payment due on him stands beyond the due date.
A Debt recovery letter can be in the form of a legal intimation and sent with the help of a legal practitioner or as an alarming note to the debtor to clear the payment. It can also be a polite request for the debtor to make the payment.
The debt recovery letter is issued with the recommendation of the text suggested by a legal practitioner in a proper format. It specifies the amount due, the timeline allowed and the legal actions to be taken in case the default continuous.
While there is no particular law requiring the mandatory issue of a debt recovery letter but as it is issued through legal professional/advocate, it becomes a legit document/communication to be presented before the law against the defaulting debtor.
Recovery Process through Debt Recovery Letter
Depending on the case situation and legal rules applicable, a Debt Recovery Letter can be processed and issued to any number of times as the professional suits fit or as per the policy adopted by creditor. Usually, 3 letters are sent for default or delay in payment where:
The first letter is issued as a gentle reminder to the purchaser/buyer or debtor, detailing the amount to be paid, the due date for payment or to allow him some more time to clear the payment as the creditor seems suitable.
The second debt recovery letter is issued referring to the first letter, in case no response is received or the debtor further delays the payment. The second letter specifies some additional penalties or consequences to be faced if some further timeline is violated.
The third letter is issued as a formal legal intimation to the debtor for clearing off the payment with interest or stating the legal actions will be taken against him for non payment.
Even if there is no response from the buyer/debtor for the final intimation or if he neglects to make the payment, then the seller/creditor can take legal action with all source documents and with a copy of debt recovery letters through a legal professional.
Note: For companies registered under the Companies Act defaulting in payment of debtors, a legal proceeding can be initiated against them under Insolvency And Bankruptcy Code (IBC). While for other business forms or transactions a legal suit is to be filed following the provisions of Indian Penal Code.
Tips to Follow while Drafting a Debt Recovery Letter
- It is important to mention about the contractual agreement undertaken for which the payment was due in the letter and with event details applicable.
- With first letter, one has to be polite, concise and specific about the subject for which you are issuing the letter , the amount owed and the final date for which the payment had to be cleared.
- Settlement amount shall also be specified, if willing to accept any alternative settlement option with the debtor.
- It is important to avoid negative expressions involving any threatening statements/context.
- Keep it object-oriented and professional.
- The letter should not be too long it should be minimum and concise and clarify the intent.
- Remember to keep copies of the letter before issuing it to the debtor as they shall be in long run used as an evidence.
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