Legally compliant unsecured debt recovery process for enterprises

In business activities, the occurrence of outstanding debts that have not been paid is difficult to avoid. In particular, for unsecured debts, creditors often face greater difficulties in the recovery process because there is no secured asset to be handled when the obligor fails to perform its payment obligations. If not handled promptly, the debt may remain outstanding for an extended period, affecting the enterprise's cash flow and production and business activities, while increasing the risk that the debt cannot be recovered.

In practice, the term “unsecured debt recovery” may be used in different contexts. For banks, finance companies, and credit institutions, the “unsecured debt” is commonly used to refer to loans without collateral. Meanwhile, for ordinary enterprises that do not operate in the banking or credit sector, a debt arising from an unsecured loan transaction is, in essence, an unsecured debt.

Therefore, establishing and applying a legally compliant unsecured debt recovery process not only helps enterprises improve the effectiveness of debt recovery but also limits potential legal risks. This article analyzes the debt recovery process, the documents that need to be prepared, as well as important considerations for enterprises to effectively handle unsecured debts.

1. What is unsecured debt recovery?

1.1. Case 1: The creditor is a bank, finance company, or credit institution

According to Clause 8, Article 292 of the 2015 Civil Code, credit guarantee is one of the security measures for the performance of civil obligations. In credit activities, the term “unsecured loan” is commonly used to refer to a loan without collateral, whereby the lender considers granting credit based on factors such as the borrower's reputation, financial capacity, and ability to repay the loan.

Unsecured loans commonly arise in the credit activities of banks, finance companies, and other credit institutions. Under the 2024 Law on Credit Institutions, lending is a form of credit extension; banking activities of credit institutions are conducted within the scope permitted by law and under their granted licenses. Accordingly, where a loan is provided as part of the banking or credit activities of these entities, the granting of credit and debt recovery must comply with relevant specialized legal regulations.

When the borrower fails to perform or fails to fully perform its repayment obligations, the bank, finance company, or credit institution may apply appropriate measures to recover the debt in accordance with the law. In this case, requesting the borrower to perform its payment obligations in respect of an unsecured loan is commonly referred to as unsecured debt recovery.

1.2. Case 2: The creditor is an enterprise

For enterprises that do not operate in the banking or credit sector, where an enterprise lends money to another organization or individual without collateral, the resulting debt is, in essence, an unsecured debt.

This case should be distinguished from credit extension activities conducted by banks, finance companies, and credit institutions. The fact that an ordinary enterprise incurs a debt arising from an unsecured loan transaction does not mean that such enterprise is conducting banking or credit extension activities under the laws on credit institutions.

However, this case shares a similarity with unsecured debt in credit activities in that the lender does not have collateral to handle when the borrower breaches its payment obligations. Thus, although the terms are used in two different contexts, the common feature of the debts discussed in this article is that the creditor does not have collateral that can be directly handled when the obligor breaches its payment obligations. For banks, finance companies, and credit institutions, such loans are commonly referred to as unsecured loans. For ordinary enterprises, a debt arising from an unsecured loan transaction is understood as an unsecured debt.

Within the scope of this article, TNTP focuses on the second case, namely, the recovery by ordinary enterprises of unsecured debts. Enterprises may apply appropriate measures to recover such debts, including debt reminders, negotiation, payment demands, litigation, and requests for enforcement when necessary.

2. When does an enterprise need to recover unsecured debt?

Not every delayed payment immediately requires the application of legal measures. However, an enterprise should proactively initiate the debt recovery process when one or more of the following signs arise:

1. The debt has exceeded the payment deadline under the contract or agreement between the Parties. This indicates that the repayment obligation has been breached and that the enterprise has a legal basis to immediately demand payment.
2. The enterprise has repeatedly reminded the Debtor to make payment, but the Debtor has failed to perform its obligations. Ineffective debt reminders are a sign that debt recovery measures should be applied to avoid allowing the debt to remain outstanding for too long, which may make recovery more difficult.
3. The Debtor deliberately delays, avoids, or fails to respond to the enterprise's payment requests. Such conduct indicates a low level of willingness to repay and increases the risk of being unable to recover the debt.
4. The Debtor shows signs of financial difficulties or faces the risk of dissolution or bankruptcy. This situation require prompt action to avoid the dissipation of assets or the Debtor becoming unable to make payment.
5. The Debt has a significant value and affects the enterprise's cash flow and business operations. The enterprise should prioritize recovery to ensure financial stability and maintain its business operations.

Proactively recovering debts at an early stage also contributes to increasing the likelihood of recovery before the Debtor's financial situation deteriorates further or additional legal risks arise.

3. Unsecured debt recovery process

To ensure effectiveness and compliance with legal regulations, an enterprise may carry out the unsecured debt recovery process through the following steps:

3.1. Step 1. Review the documents and determine the legal basis for debt recovery

This is an important step to assess the possibility of recovering the debt. The enterprise should review all relevant documents, such as contracts, contract appendices, invoices, minutes of delivery or service acceptance, payment documents, email correspondence, and other documents evidencing the Debtor's payment obligations.

In addition, the enterprise needs to accurately determine the outstanding amount, the date on which the obligation arose, the payment deadline, late payment interest, any penalty for late payment (if applicable), and the statute of limitations for initiating legal proceedings under the law. A comprehensive review of the documents will help the enterprise select an appropriate course of action in the subsequent steps.

3.2. Step 2. Prepare and confirm the debt reconciliation statement

During the debt recovery process, the enterprise should proactively request the Debtor to confirm the outstanding balance of its obligations through a debt reconciliation statement or a written acknowledgment of the repayment obligation. The document should clearly state the principal amount, interest, fees or other financial obligations (if any), the date of confirmation, and the payment deadline.

A debt reconciliation statement bearing the Debtor's signature or valid confirmation is an important document that helps the enterprise strengthen the basis for proving the existence and value of the debt. Under the 2015 Civil Procedure Code, readable, audible, and visual materials, electronic data, and other sources that satisfy the conditions prescribed by law may be used as evidence. Having a written acknowledgment of the debt makes it easier for the enterprise to prove its payment claim when the dispute is resolved by a Court or Arbitration.

However, preparing a debt reconciliation statement does not replace other supporting documents. The enterprise should still retain contracts, delivery or acceptance documents, disbursement documents, payment documents, transaction records, debt reminder notices, emails, and other relevant documents to ensure a comprehensive evidentiary basis for the debt recovery claim.

3.3. Step 3. Contact the Debtor and remind them to make payment

After clearly determining the basis for the debt and its value, the enterprise should proactively contact the Debtor via email, telephone, or written notice to remind the Debtor to make payment. At this stage, the primary objective is to create an opportunity for the Parties to resolve the matter in good faith while saving time and costs.

The enterprise should retain all communications in written form, such as emails, minutes of meetings, debt reminder notices, and other relevant documents, as evidence in the event that a dispute continues to arise. Retaining these documents not only helps establish the transaction process and the obligations of the Parties but also provides a basis for protecting the enterprise's lawful rights and interests when resolving the dispute.

3.4. Step 4. Negotiate and develop a payment plan

Where the Debtor is experiencing financial difficulties but continues to demonstrate a willingness to cooperate in performing its payment obligations, the enterprise may consider entering into negotiations to find an appropriate payment plan.

During this process, the Parties may agree to extend the payment deadline, repay the Debt in installments, or adjust the payment method to suit the Debtor's actual financial capacity.

At the same time, the enterprise should request the Debtor to provide a written commitment regarding the debt repayment schedule. Preparing minutes of meetings or entering into a payment agreement not only helps clearly record the Parties' intentions but also serves as an important document for proving the Debtor's repayment obligation if a dispute arises or litigation must be initiated later.

3.5. Step 5. Send a Letter of Demand

Where debt reminders and negotiations do not produce results, the enterprise should send a Letter of Demand, clearly stating the information of the Parties, the basis on which the debt arose, the amount payable, the deadline for performance of the obligation, and the legal measures that the enterprise may take if the Debtor continues to breach its obligations.

Sending a Letter of Demand demonstrates the enterprise's good faith before applying more stringent legal measures, while also creating additional documentation to prove the process of requesting the Debtor to perform its obligations when resolving the dispute before a Court or Arbitration.

3.6. Step 6. Initiate legal proceedings when the Debtor fails to perform its obligations

Where the Debtor fails to make payment or cooperate after the enterprise has applied negotiation, debt reminder, and payment demand measures, the enterprise may initiate legal proceedings before a competent Court or request dispute resolution by Commercial Arbitration if the Parties have a valid arbitration agreement.

Under the 2010 Law on Commercial Arbitration, a dispute shall be resolved by arbitration if the parties have an arbitration agreement. Accordingly, where the contract or agreement between the Parties contains an appropriate arbitration clause, the enterprise may choose this method to request dispute resolution.

During dispute resolution, the enterprise needs to prepare and provide sufficient evidence to prove the transaction relationship between the Parties, the Debtor's payment obligation, and the Debtor's breach of such obligation.

Documents such as contracts, delivery or acceptance documents, payment documents, debt reconciliation statements, payment agreements, debt reminder letters, and other relevant evidence may play an important role in determining the Debtor's payment liability.

At this stage, a lawyer may assist the enterprise in comprehensively assessing the documents, determining the legal basis for initiating proceedings, preparing the statement of claim and supporting evidence, and representing or protecting the enterprise's lawful rights and interests during the proceedings. Having a lawyer accompany the enterprise helps minimize procedural errors, select an appropriate course of action, and improve the effectiveness of debt recovery.

3.7. Step 7. Request enforcement from the competent agency

After the Judgment/Decision/Award of the competent dispute resolution authority becomes legally effective, if the Debtor still fails to voluntarily perform its obligations, the enterprise has the right to request the civil judgment enforcement authority to organize enforcement. During the enforcement process, the competent authority may apply enforcement measures in accordance with the law against the judgment debtor to ensure the performance of its obligations. Therefore, promptly requesting enforcement is an important step for the enterprise to continue exercising its rights after obtaining a dispute resolution outcome.

Thus, for ordinary enterprises recovering unsecured debts, the unsecured debt recovery process should be carried out systematically, from reviewing documents, confirming the debt, negotiating, and demanding payment to initiating legal proceedings and enforcement when necessary. Preparing complete documentation and selecting an appropriate course of action from the outset will contribute to increasing the likelihood of debt recovery.

4. Important considerations when recovering unsecured debt

During the unsecured debt recovery process, particularly for unsecured debts of enterprises, enterprises should take note of the following important matters:

First, prioritize negotiation before applying litigation measures. In many cases, reaching a payment agreement through negotiation will help the Parties save time and costs while creating conditions for the debt to be paid without having to initiate legal proceedings.

Second, do not use unlawful measures during the debt recovery process. Enterprises should not threaten, coerce, insult the dignity of, or place unlawful pressure on the Debtor. Debt recovery must be conducted through methods that comply with the law.

Third, retain all evidence throughout the process of working with the Debtor. All contracts, debt reconciliation statements, payment agreements, emails, minutes of meetings, debt reminder notices, and documents relating to the performance of payment obligations may become important sources of evidence if a dispute arises.

Fourth, proactively confirm the debt and payment deadline. Preparing a debt reconciliation statement or written acknowledgment of the repayment obligation helps the enterprise clearly record the outstanding amount and the status of the Debtor's performance of its obligations, thereby strengthening the documentation in the event that the dispute must be resolved.

Fifth, for high-value debts or complex cases, enterprises should seek advice from a lawyer. A lawyer can assist the enterprise in assessing the documents, determining the legal basis, selecting an appropriate course of action such as negotiation, litigation, or enforcement, thereby helping to limit risks and increasing the likelihood of debt recovery.

Unsecured debt recovery can be challenging because the enterprise does not have collateral to handle when the Debtor breaches its obligations. However, if the enterprise establishes a systematic debt recovery process, from reviewing documents, confirming the debt, negotiating, and sending payment demands to initiating legal proceedings and enforcement when necessary, the likelihood of recovering the debt can be increased.

Where the debt has a significant value, remains outstanding for an extended period, or involves multiple complex legal issues, the enterprise should have a lawyer's support from the early stage to select an effective course of action, limit risks, and best protect its lawful rights and interests. TNTP's lawyers are always ready to support, advise, and accompany enterprises throughout the debt recovery process.

Best regards,