When to use a debt collector

One of the questions I often get asked is “when should I put this debt in the hands of a collector?” This is because there is always conflict between the fear of upsetting the client and having them either go somewhere else or bad mouthing you, and a desire to get paid.

There is nothing wrong with this conflict but I believe there are a number of points to consider before the question can be answered.

Do you know honestly know why you haven’t been paid?

This question is asked because there are only four reasons why debtors don’t pay their accounts; administrative error (I forgot to pay, or you didn’t put enough detail on your invoice), dispute, cash flow difficulties, or lack of ethics. Unethical debtors are whom I describe as plonkers.

If there is an administrative error then you can ask when you should expect payment. Diarise for receipt of the payment though, as you need to contact your debtor the day after payment is expected, if it hasn’t been received.

In the case of a dispute, resolve the dispute. Yes your debtor should have contacted you when they first received the invoice, but in practice New Zealander’s are not traditionally complainers and they would rather you make the first contact.

If it is a cash flow difficulty, remember that unless your permission has been asked first, you should dictate the payment terms to suit you.  Get agreed terms in writing (a quick email will do) so that your debtor is left in no doubt as to your expectations.

Therefore the services of a debt collector are only required to deal with plonkers. In all other instances you should be able to come to some agreement with your debtor regarding payment.

Why do you want to use a debt collector?

You should never use a debt collector for revenge or out of desperation. A debt collector should only be used to supplement your processes. In other words, once you have found out that your debtor is a plonker and they are not communicating with you.

How long has it been since you last communicated with your debtor?

If a debtor really is a plonker then there is a good chance that, instead of fronting up and being honest with a creditor they will just put their head in the sand and try to avoid their responsibilities.

This leads to a sense of frustration, how can you negotiate with a debtor who won’t even talk to you? There are two reasons why debtors won’t talk to you; either they are under extreme cash flow pressure or they have no intention of paying and are simply unethical.

In both instances your chances of recovery are going to be dictated by how quickly you take action. Yes it’s the old ‘the earliest bird gets the worm’ syndrome.

If it’s a cash flow issue, it’s about ensuring payment to you takes priority over paying anyone else. If the debtor has no intention of paying, the earlier pressure is brought to bear the better.

So the answer to question “when should I put this debt in the hands of a collector?” is quite simple – as soon you are unable to communicate with your debtor in a meaningful manner.

Should trusts be registered?

As a debt collector I have seen an increase in requests to collect money from trusts. Given the number of trusts out there this does not surprise me.

The challenge for creditors of trusts is who is liable for the debt? This is because the only record of who the trustees of a trust are is in the trust deed and associated documents. It could be argued that creditors should ask for copies of trust deeds before they extend credit to a trust but I would have to say this is most impratical when a debt is for a small amount.

To lower the risk of doing business for creditors I think it would be a good idea to register trusts in much the same way as companies are registered. It would be straight foward and allow anyone to know who the trustees of a trust are. (Trustees are personally liable for any debts incurred by trusts but I have my doubts that many are aware of this)

It is interesting that an article in yesteredays Sunday Star Times also discussed the benefits of registering trusts and listed 10 reasons to do so. I would suggest that  resons 2 & 9 are relevant for creditors, just look at their titles- Defying Creditors & Introducing Complexity.

I would be interested in your feed back on this idea.

Unfair Contract Conditions in Terms of Trade

The Ministry of Consumer Affairs has been giving some thought to outlawing unfair contract terms under their review of consumer law.

Essentially the Ministry sees some clauses in standard type contracts being unfair to consumers and they want to have them banned by statute. A recent Sunday Star Times article gives some good examples of the effect these clauses.

Cash Flow Doctors believes that there is a good chance that these changes will be made - there is after all unfair contract terms legislation already in place in Australia and the UK. They would also seem to be a reasonable thing to do.

HOW DOES THIS EFFECT YOU?

If you are considering setting up a terms of trade or standard contact  it bears to keep in mind about 'unfair' clauses. This doesn't mean you should not put a new terms of trade in place but keep in mind the intended changes to the law.

If you have terms of trade already you don't have to do anything at present. We will be advising our clients via our newsletter when (and if) any changes do take place so sign up now.

For Cash Flow Doctors clients we will contact you all if necessary to update your current documentation as required as part of our regular update process.

7 Day Waring Letter

One of the comments that I often hear when talking to a prospective client is that they want to give the slow payer one last chance to pay their account by sending a final warning letter before placing the debt with a collection agency.

I don’t have a problem with this so long as the final warning letter is part of the usual accounts receivable process. I sometimes ask, out of curiosity, to review the wording of the final warning letter used to see how it compares to my own.

There are some common mistakes that are made when a final warning letter is used.

Firstly they do not stipulate how much needs to be paid to clear the outstanding debt. I always say that the amount to be paid is the amount you want in your bank account. It may include interest or administration charges along with the balance of the invoices outstanding.

However, keep in mind that you only have the right to charge additional fees on top of the amount of the overdue invoice if you have told your debtor they are liable for these penalties at, or before, the time you form a contract with them.  The issue of the timing of disclosure will be the topic of a further column but if you want to find out more go to www.comcom.govt.nz/debt-collecting/ and download the debt collecting fact sheet.

Secondly if you are going to threaten to send the debt to a collection agency then follow through with the threat otherwise the slow payer will thumb their nose at you. In other words you need to have made the decision to place the debt with a collection agency before you send the final warning letter.

It is also a good idea to name the collection agency you are going to use first as it gives the impression that you have already spoken to the collection agency, and they are ready to proceed with the collection. This also means your debtor is not surprised when your collection agency first contacts them.

Finally, if you are able to on-charge the costs of collection tell your slow payer how much this will be in dollar terms. Which do you think is the more effective statement?

•    Collection costs will be added to the amount outstanding, or
•    $250 of collection costs will be added to the amount outstanding.

Debt collection is psychological and it pays to take advantage of every tool possible to encourage payment of an outstanding debt. Final warning letters can be very effective if worded and used correctly.

A further benefit of a well worded warning letter is that it is becoming more common for the Disputes Tribunal to look unfavourably on you charging penalty interest, administration fees, and collection agency costs if the debtor has not been warned first. This is despite the fact that you have the right to charge these fees if they have been properly disclosed as required by the Fair Trading Act.

I have received feedback from clients who have used our final warning letter as part of their process and have successfully recovered long outstanding debt. Even though I ultimately miss out on a commission, it does give me a great deal of satisfaction to hear of payments being made.

Disputes Tribunal Findings

As a debt collector our clients are adding costs onto any debts to be collected where they can. This happens when they have disclosed this right to their debtor when a contact was formed between the parties.

A number of decisions I have read from the Disputes Tribunal appear to take away the creditors right to charge costs unless they have given the debtor 'fair warning'. By fair warning the Disputes Tribunal seem to consider a final warning letter as being satisfactory.


At Cash Flow Doctors we have developed a final warning letter which anyone is welcome to use on their own letter head.

The other benefit of the wording of this final warning letter is that credit reporting agencies such as Veda Advantage also require fair warning before a debtor can be listed as a defaulter.