The process of recovering bad debts of businesses in accordance with the law

In business operations, customers or partners who make late payments or fail to fully perform their financial obligations may cause businesses to incur bad debts that are difficult to recover. If not handled promptly, businesses may not only face cash flow difficulties but also risk disputes, losing the ability to recover assets, or missing the statute of limitations for initiating legal proceedings. The following article analyzes the bad debt recovery process for businesses and highlights several legal considerations that businesses should be aware of to protect their lawful rights and interests.

1. What is bad debt recovery?

1.1. What is considered bad debt of a business?

Current laws do not provide a uniform definition of “bad debt” applicable to all civil and commercial relationships between businesses. In practice, bad debt of a business may be understood as a debt that has fallen due for payment but the obligated party has failed to perform, or has failed to fully perform, its payment obligations as agreed, while there are indications that the recovery of such debt is difficult or carries a risk of non-recovery.

Businesses should distinguish between overdue debt and bad debt. Overdue debt refers to a debt that the obligated party fails to pay by the agreed deadline. Meanwhile, the term “bad debt” is generally used to refer to overdue debts with a high risk of non-recovery, such as where the debtor delays payment for an extended period, fails to cooperate, becomes insolvent, or shows signs of reducing the creditor’s ability to recover the debt.

1.2. When should a business apply a bad debt recovery process?

A business should proactively initiate a debt recovery process when it identifies that a debt is at risk of becoming difficult to recover or that the debtor is unwilling to perform its obligations. Common signs include:

• First, the debt has fallen due, but the debtor has failed to make the required payment. This is a basic indication that the business should review the contract, transaction documents, and outstanding debt records, and take appropriate measures to demand payment.
• Second, the debtor repeatedly delays or avoids its payment obligations. Where the debtor repeatedly makes commitments regarding payment deadlines but fails to honor them, does not respond to payment demands, or deliberately prolongs the resolution of the outstanding debt, the business should promptly assess the likelihood of debt recovery and determine an appropriate course of action.
• Third, the debtor shows signs of serious financial difficulties or is no longer able to make payments. Signs such as the business ceasing operations, scaling down its business activities, being subject to a request for dissolution, having a petition filed for the commencement of bankruptcy proceedings, or experiencing serious difficulties in performing its financial obligations may increase the risk that the debt cannot be recovered.
• Fourth, the debtor shows signs of transferring, concealing, or diminishing the value of its assets. This is a situation to which the business should pay particular attention, as any delay in taking action may adversely affect its ability to secure and recover the debt.

2. Bad debt recovery process for businesses

• Step 1: Reviewing documents and determining the status of the debt

This is an important step that enables a business to assess the likelihood of recovering the debt and select an appropriate course of action. Before taking any debt recovery measures, the business should review all documents and materials relating to the debt, including:

• Contracts and contract appendices;
• Purchase orders, quotations, acceptance minutes, or minutes of handover of goods or services;
• Invoices and payment documents;
• Debt reconciliation statements;
• Emails, messages, or other documents evidencing the acknowledgment of the payment obligation;
• Documents on extensions of payment deadlines or payment commitments (if any).

Based on the documents reviewed, the business should determine the principal debt, late payment interest, contractual penalties (if any), payment deadline under the contract, and the debtor’s financial capacity and operating status.

• Step 2: Sending a notice or written payment demand

After determining the debt, the business should send a notice or written payment demand to the debtor. Although the law does not require a business to take this step before initiating legal proceedings in every case, sending a payment demand provides an opportunity for the parties to resolve the dispute amicably and demonstrates the business’s willingness to resolve the matter. The payment demand should specify the basis on which the payment obligation arose, the amount payable, the payment deadline and method, and the measures to be taken if the debtor fails to perform its obligations. The business should choose a method of delivery that can evidence the sending and receipt of the document, such as registered mail, courier service with proof of delivery, email, or another method agreed upon by the parties. Such documents may serve as valuable evidence if the dispute is subsequently resolved by a court or commercial arbitration.

• Step 3: Negotiating and working with the debtor

After verifying and/or establishing the outstanding debt, the business should prioritize negotiations and direct discussions with the debtor to reach a voluntary payment agreement. Depending on the debtor’s ability and willingness to cooperate, the parties may agree to extend the payment deadline, make payment in installments, adjust the payment schedule, or adopt other appropriate arrangements. The outcome of the negotiations should be documented in writing or recorded in minutes of the meeting duly acknowledged by the parties as a basis for implementation. If the debtor subsequently breaches its commitments, these documents may be used as evidence when the business takes further legal measures.

• Step 4: Initiating legal proceedings to require payment before a court or commercial arbitration

If the debtor fails to make payment after the above steps have been taken, the business may initiate legal proceedings to resolve the dispute in accordance with the law. Depending on the agreement between the parties, the dispute may be resolved by a court or commercial arbitration. The claim file includes a statement of claim together with documents and evidence proving the debt and the process of demanding payment. During the proceedings, if there are grounds to believe that the debtor is dissipating assets, transferring ownership rights, or taking actions that may affect the ability to enforce the judgment in the future, the business may request the court to apply interim urgent measures in accordance with procedural law to ensure the resolution of the case and subsequent enforcement of the judgment.

• Step 5: Requesting enforcement after a legally effective judgment or decision

To protect its lawful rights and interests, the business, at this stage, becomes the judgment creditor and should exercise its right to request enforcement in accordance with the Law on Civil Judgment Enforcement. Accordingly, the judgment creditor submits a request for judgment enforcement and cooperates with the civil judgment enforcement authority throughout the enforcement process, including the verification of the judgment debtor’s enforcement conditions and the application of coercive enforcement measures. At this stage, proactively monitoring and providing information concerning the assets and enforcement conditions of the judgment debtor is important to ensure that the judgment is actually enforced.

3. When should a business use legal debt recovery services?

For debts of relatively small value, where the documentation is complete and the debtor remains willing to cooperate, the business may proactively reconcile the outstanding debt, send a payment demand, negotiate, or enter into a debt repayment agreement or commitment. This approach can help reduce costs and maintain the business relationship between the parties. However, for debts showing signs of being difficult to recover, a business should consider using legal debt recovery services, particularly in the following circumstances:

• The debtor delays performance of its payment obligations

When a debt is past its contractual payment deadline but the debtor still fails to fulfill its payment obligations despite the business having repeatedly sent reminders, official letters, or held direct discussions, the business should seek legal assistance. A lawyer can review the relevant documents, assess the legal grounds, and advise on an appropriate course of action, including sending a written payment demand, negotiating with the debtor, or initiating legal proceedings where necessary. Timely legal intervention can help the business avoid prolonged debt recovery efforts while reducing the risk of the statute of limitations for initiating legal proceedings expiring or other legal risks arising.

• The debtor avoids or refuses to cooperate

Where the debtor deliberately avoids discussions, fails to respond to payment demands, refuses to perform its obligations, or shows signs of dissipating assets to evade liability, the business should promptly take legal measures to protect its rights and interests. A lawyer can represent the business in working with the debtor, collect and strengthen evidence, and prepare the litigation dossier or request the application of interim urgent measures in accordance with the law where the relevant conditions are satisfied.

• The debt is of high value, the documentation is complex, or the matter involves foreign elements

For high-value debts or debts arising from multiple contracts, contract appendices, purchase orders, acceptance minutes, invoices, and other transaction documents, assessing the evidence and developing an appropriate course of action can be relatively complex. In addition, disputes involving foreign elements may raise additional issues concerning jurisdiction, applicable law, and the recognition and enforcement of judgments or arbitral awards in foreign countries. In such cases, a lawyer can assist the business in reviewing the entire set of documents, determining the rights and obligations of the parties, assessing the likelihood of debt recovery, and developing an appropriate dispute resolution strategy.

4. Some notes during the bad debt recovery process

• Maintain complete records and documents

From the time a transaction is established, the business should maintain all relevant documents as mentioned in Section 2 of this article. Complete records and evidence provide a basis for the business to establish and prove its right to demand payment, while also supporting the negotiation, dispute resolution, and judgment enforcement processes.

• Carry out debt recovery measures in compliance with the law

A business has the right to demand that the debtor perform its payment obligations; however, debt recovery must be carried out through lawful means. Any coercive or threatening debt collection activities, or acts that infringe upon the lawful rights and interests of the debtor, may result in legal liability. The business should avoid unlawful debt recovery practices, such as threatening, intimidating, or insulting the debtor; taking possession of or disposing of assets without authorization; publicly disclosing information about the debt to exert pressure; or hiring or asking others to use unlawful measures to compel the debtor to make payment.

• Note on the statute of limitations for initiating legal proceedings

One of the issues that businesses often overlook is the statute of limitations for initiating legal proceedings. In practice, many businesses spend too much time negotiating, resulting in delays in taking legal measures and potentially affecting their right to initiate legal proceedings. Pursuant to Article 319 of the 2005 Law on Commerce, the statute of limitations for initiating legal proceedings applicable to commercial disputes is 02 years from the date on which the lawful rights and interests are infringed, except in cases involving exemption from liability applicable to logistics service providers. Therefore, as soon as a debt shows signs of becoming difficult to recover, the business should review the date on which its right to demand payment arose, the date on which the limitation period began to run, and any grounds that may affect the limitation period (if any), so as to promptly select an appropriate course of action.

Bad debt recovery is a process that requires businesses to be proactive, timely, and equipped with an appropriate course of action for each debt. For long-outstanding debts, cases where the debtor refuses to cooperate, disputes arise, or there are signs of asset dissipation, businesses should consider using legal debt recovery services to receive assistance in reviewing documents, developing an appropriate course of action, and carrying out the necessary procedures to protect their lawful rights and interests.

Sincerely,