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What are your legal options if you are owed money? What are your legal options if you are owed money?

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May 24

What are your legal options if you are owed money?

Written by Sophia Bavin
Paralegal

E: sophia.bavin@raworths.co.uk

There are several reasons why someone might owe you money, it could be an unpaid loan, a gift that you want back or, in a commercial context, an unpaid invoice to a customer or other third party. Although chasing a debt is never a pleasant task, there are a number of legal options open to you if you are owed money.

If you are owed money, court action should usually be a last resort as it can be both costly and time-consuming. There are several other routes you can try first to recover your money in a more timely and inexpensive manner.

Negotiation and mediation

Your first port of call should be to attempt to contact the person who owes you money and ask for it back. If this fails and things are getting heated, or the debtor refuses to acknowledge your claim, you could attempt mediation.

This involves you sitting down with a trained mediator who does not take sides, but merely helps you and the other party to discuss your issues until a satisfactory resolution can be found.

Statutory demand

Mediation is not for everyone, particularly if there is a lot of bad feeling between the parties. Another approach, if the debt is undisputed but payment is not forthcoming, is to ask a solicitor to send a statutory demand.

This is a formal written demand for the money you are owed. Once the debtor receives it, they have three weeks to pay; if they do not pay, you can use the statutory demand to ask a court for a winding up order (in the case of a company) or a bankruptcy order (if the debtor is an individual).

However, a statutory demand cannot be used in every case, and there are specific instances in which it can be used; generally the debt must be for a liquidated sum i.e. a specific amount which has been fully quantified, and the debt cannot be disputed.

Serving a statutory demand is commonly a precursor to commencing bankruptcy proceedings against a debtor, and therefore is not a step that should be taken lightly. When looking to recover a debt all of the relevant factors should be carefully considered before deciding on an approach.

A statutory demand is a draconian tool, and can therefore be perceived by debtors as  quite an aggressive approach. In the context of a business debt, this can have a negative impact on an ongoing business relationship.

There is also the risk that the debtor brings a court application to have the statutory demand set aside, for example if the debt is disputed, if there is a counterclaim, or if you hold some sort of security for the value of the debt. If this application is granted, you may be liable to pay the costs of the other side in bringing the application.

It is therefore important that you consider all of your options when attempting to recover debt, and take advice at the earliest opportunity to ensure you take the best approach for you.

Bankruptcy and winding up orders

You can only start bankruptcy proceedings against someone who owes you £5,000 or more and you can only apply to have a company to be wound up if they owe you £750 or more. You have four months to apply to bankrupt or wind up your debtor. If you are late, you will have to explain your reasons to the court named on the statutory demand.

If you are successful in obtaining a bankruptcy or winding up order, the debtor’s assets and finances can be seized to pay off the debt; however, there is no guarantee that the funds raised will be enough to cover the debt, and other creditors may come forward with debts that take priority over your own.

Debt collector

You may be able to ‘sell’ the debt to a debt collector. They will pay you a reduced sum, however this course of action may take the stress of collecting the debt away from you. Once you have sold the debt, it is the responsibility of the debt collector to recover the money, and you need have no further involvement in the matter, whether or not the debt collector recovers the money owed.

Court action

It may be that Court action is the best option for you. There is no minimum amount you can claim for in the County Court, but court fees mean you need to ensure the debt is one that is worth pursuing. This may be the case where the debtor is disputing the debt, therefore making a statutory demand unsuitable.

Bringing an action in Court is, however, a serious undertaking and will involve a significant amount of work. If you choose to instruct a solicitor you will have their costs to consider, which may not be recoverable from the other side even if you win your case. Going to Court to recover a debt is the same process as going to Court for most other civil claims, which means that you must still prove your case and it may take months, or even years to see your case through to trial.

If you obtain a Judgment from the court, you can take enforcement action against the debtor to get back the money owed. This might be by obtaining an attachment of earnings orders or charging order or, more commonly, through instructing a bailiff or High Court Enforcement Officer to go to the debtor’s home and collect the debt or seize goods equal to the worth of the debt.

The County Court Judgment will also be put on record against the debtor, which will affect their ability to get credit.

You will usually have up to six years to bring a court claim, after which you will generally be barred from pursuing the claim under the Limitation Act 1980.

Evidence

In an ideal world, you would have a signed contract that outlines how much money is owed, along with details of when it should have been paid off. However, if no such written agreement exists, you should gather as much evidence as you can to prove your claim. This might include:

  • unpaid invoices;
  • cheques that have bounced;
  • communications such as emails, letters, or texts which show you have been chasing the debt;
  • bank payments;
  • witnesses;
  • evidence such as bank statements which would show details of your income and savings, hopefully backing up your assertion that the money was a loan not a gift; and
  • account history.

Gifts you want to get back

The legal definition of a gift is ‘the voluntary transfer of property from one individual to another made gratuitously to the recipient’ i.e. you were happy to give the gift and expected nothing in return. If you made a gift on this basis (as most gifts are given) it is unlikely you will be able to recover the gift.

The only exception is that you may be able to recover a gift if it was given with conditions that were not adhered to. For example, if you gave your child money to serve as a deposit on a house, and the money was not used for this purpose, you may then have grounds for reclaiming the gift.

How we can help

If you want to reclaim a debt, it is a good idea to seek advice from a solicitor as soon as possible. They will outline all your legal options and advise you on the best course of action.

They can deal with all negotiations with the debtor so that you do not have to, recommend an experienced mediator, deal with all the paperwork involved in making a statutory demand, or take the necessary steps to win your case in court if necessary.

For further information, please contact Sophia Bavin in the Dispute Resolution team at Raworths, Harrogate, North Yorkshire.  Email Sophia.bavin@raworths.co.uk

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.

Published on 14 May 2024

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