Debt recovery is a multi-stage process, and for each debt, different measures are needed for recovery. Therefore, identifying debts that are easy or difficult to recover helps businesses make appropriate choices for debt recovery strategies. In this article, TNTP’s lawyers will provide insights into what are considered difficult-to-recover debts in the construction industry to give businesses a better perspective on this issue.
1. Debts Outstanding for an Extended Period
A debt that has been outstanding for more than 12 months is considered difficult to recover because, over these 12 months, two possibilities may arise: (i) The debtor may lack the financial capacity to repay the debt, or (ii) The debtor may not cooperate in repaying the debt. Specifically:
(i) Debtor Lacks the Financial Capacity to Repay
When the debtor lacks the financial capacity to repay, it is often due to their current financial situation not being sufficient to make full debt payments, or the debtor has ceased operations and is currently not generating revenue, making it impossible for them to repay the debt. If the debts owed to the business fall into these categories, the likelihood of debt recovery is very low.
(ii) Debtor Does Not Cooperate in Repayment
This is the most common scenario where the debtor has an uncooperative attitude and does not cooperate in repaying the debt. In such cases, lack of cooperation is evident in the debtor not making timely payments, not responding to the business’s payment requests, or continuously providing reasons to delay payment, even when the debtor has the means to repay the debt. To recover debts in these cases, businesses may need to file a lawsuit with dispute resolution authorities to seek resolution as per legal regulations to ensure the debt can be recovered.
From the above information, it can be seen that allowing debts to remain outstanding for more than 12 months carries significant risks during the debt recovery process.
2. Debtor Has No Financial Capacity and Is No Longer Operational
The most crucial condition for a debtor to be able to repay a debt is that they must have financial resources or assets. In cases where the debtor no longer has assets or is no longer operational, the debtor will be unable to repay the debt to the business. This is the primary reason why businesses must constantly monitor the activities of their debtors and implement necessary measures as soon as they detect any unusual signs in the debtor’s operations.
In cases where the debtor is no longer operational but still possesses assets, the business can indeed initiate legal proceedings to request the relevant state authority to enforce the judgment on the remaining assets. However, it should be noted that in cases where the debtor has accumulated numerous debts with different creditors, the business’s likelihood of recovering the debt is very low.
3. Debts Arising from Transactions Without Contracts or Debt Reconciliation Documents
In many cases, if a business and a debtor engage in buying and selling activities or services without a formal contract, it poses significant legal risks and makes debt recovery very challenging. Contracts and agreements are documents that establish civil relationships and directly bind the rights and obligations of the parties, as well as determine the debt that arises from a legally valid relationship. Without a contract, it becomes very difficult for a business to prove the existence of a transaction. In cases where a business initiates legal action, dispute resolution authorities may find it challenging to accept the debt recovery request from the business in a transaction that is not documented in writing.
Furthermore, a crucial document that affects debt recovery is the debt reconciliation document, which precisely identifies the outstanding debt along with the debtor’s confirmation. If the parties do not create a debt reconciliation document, demanding repayment from the debtor can become very difficult in cases where the debtor is uncooperative and does not acknowledge the debt. This can lead to protracted legal disputes as the business has to prove the debtor’s obligation to pay.
Contracts and debt reconciliation documents are two essential documents for debt recovery processes. Therefore, in cases where a business cannot obtain contracts or debt reconciliation documents, it should carefully consider before initiating legal action against the debtor. Without sufficient evidence to support their claims, the business’s request for legal action may have difficulty gaining acceptance from dispute resolution authorities. In the meantime, the business will incur associated costs, as well as invest time and effort in pursuing a case that may have a low likelihood of success.
This article by TNTP’s lawyer shares insights on the topic of “Difficult-to-Recover Debts in the Construction Industry.” We hope that this article provides value to businesses.