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Chasing payments from suppliers or clients can often be one of the most stressful aspects of running a business. An initial and simple first step often used by businesses to recover debt is to issue a letter of demand. It is strongly recommended to issue a letter of demand before taking legal action, for instance by commencing court proceedings. However, what happens when the letter of demand does not result in the debtor repaying the debt in full?
What is a letter of demand?
A letter of demand is a formal written request from a creditor to a debtor to repay a debt owed within a specified time. It allows the creditor to put the debtor on notice for an amount (including any interest and other charges), that remains unpaid, despite previous attempts by the creditor to recover the debt.
More often than not, a letter of demand is an efficient and economical way to resolve the dispute without having to go to court or tribunal.
However, for a letter of demand to be effective and have the desired result, it must include the following key elements:
- The precise amount that is outstanding to the creditor, including:
- the particulars of the debt, for instance, as outlined in an agreement between the creditor and the debtor;
- any relevant interest and charges and under what basis they are being charged;
- the particulars of any invoices issued to the debtor;
- the particulars of any reliance on representations or promises made by the debtor to repay the debt, as an acknowledgment of the debt owed to the creditor; and
- complete and easy-to-understand calculations of the final amount of the debt owed to the creditor;
- The due date or the date by which the debtor must repay the debt, including how the debt is to be repaid – for instance, by check or into the creditor’s nominated bank account; and
- The consequences of late or non-payment of the debt, for instance, the creditor’s right to commence proceedings against the debtor and to tender the letter of demand as evidence to further the creditor’s claim against the debtor, including any claims for costs.
Do you need a lawyer to issue a letter of demand?
A good letter of demand can lay the necessary foundation for the creditor to be able to recover the debt in a timely and cost-effective manner. A lot of the time, a well-drafted letter of demand will see the debtor pay the debt in full or enter into negotiations with the creditor or enter into a payment plan.
You can issue a letter of demand yourself. However, depending on the nature of the debt and the arrangement between the parties (if any), you may wish to engage a lawyer to draft the letter of demand on your behalf.
The benefits of engaging a commercial lawyer to draft a letter of demand on your behalf may include:
- you will receive holistic advice regarding your position as a creditor as well as a plan as to what happens when and if the debtor fails to repay the debt after the due date for the letter of demand has passed;
- the letter of demand will include all relevant facts, and reliance on any contractual arrangement between yourself and the other parties, in order for the letter to cover all legal bases;
- the letter of demand will be tailored specifically to your unique set of circumstances; and
- lawyers will work with you to create a template letter of demand crafted for your business to account for future needs and ongoing debts of the business.
What happens after a letter of demand is issued?
Once a letter of demand has been issued and the debtor has been placed on notice, the debtor will have a certain period of time in which to pay the debt. During this time, the debtor may pay off the debt in full, provide a response with reasons as to why they are unable to pay the debt or attempt to negotiate a payment plan with the creditor. If a response has not been received within the specified time, there may be a number of legal avenues that can be pursued in order to get the debt paid.
It is best to engage the services of a commercial lawyer with experience in the area of Insolvency and Debt Recovery who will be able to discuss the next steps with you. These may involve negotiation, mediation, commencing court or tribunal proceedings.
Need help with writing a letter of demand?
At Ivy Law Group, we can assist with providing tailored advice to you regarding the avenues that will be most effective to recover the debt. Our experienced Commercial Lawyers have assisted many businesses with debt recovery, from negotiating on behalf of our clients to representing them in court.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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