Posted on 03 September, 2014 in Advice, Cash Flow, News

Letter of demand – How it can help you collect cash fast!

Letter of demand – How it can help you collect cash fast!

What is a letter of demand?

A letter of demand is a formal request to be paid for an outstanding debt that is owed to you. In situations when you have provided an individual or a business with goods or services and are still awaiting payment. If you have already asked them several times, sent a late notification and issued further requests for payment – a letter of demand is a more formal way to advise your debtor that you will take action in court if they do not pay you within a specified period.

How does it work?
First, at least one letter must be sent requesting payment within a ‘reasonable’ amount of time. A ‘reasonable’ time will vary as it depends on a number of factors. It is important that you give the debtor time to make arrangements and payment.

The number of letters you send depends on a few things such as time restrictions for your outstanding debt and how many other requests you have made for this same payment.

After you can show you have given the debtor more than one official opportunity to make outstanding payment with at least 21 days in total to pay, you can then proceed and lodge a final claim (called a Statement of Claim) in your local court.

What should you include in your letter of demand?

It is important you letter of demand contains:

  • The amount of the debt
  • The date the original debt was due
  • The description of the debt (i.e. money was owed for X goods or Y services provided on Z date)
  • Evidence of debt due: contracts, agreements, invoices, emails that agree to the work to be done or goods to be delivered and paid for, or other that may indicate and make clear that both you and your debtor agreed payment and the terms upon which payment was to be made.
  • Any subsequent requests you have made for payment

Are there any restrictions for sending a letter of demand?

Yes. Each court in Australia has its own restrictions on the amount that can be claimed and timing for making any claim to collect the debt. You need to ensure you have done your research and know what restrictions will affect your and which court to file your claim in.

You also have to make sure you can prove in your claim that your letter of demand was sent and received. Sending your letter by registered post or using a ‘service’ firm will ensure you can show proof of delivery.

Then what happens?

The court will give the debtor between 21 and 28 days to respond and if they don’t, you will be able to apply for what is called ‘default’ judgment, which means you don’t have to go to court and you have the right to claim your debt.

Alternatively, they may respond and offer to settle by agreeing a payment schedule (done through forms lodged officially with the court) or they may lodge a ‘counter claim’ (defence) disagreeing with the amount or payment due altogether. You will have to go to court in this case.

How do I get paid?

You will either have:

  • A default judgment as the debtor did not respond and you will have an enforceable legal right to your money;
  • An actual judgment if you go to court and they rule in your favour;
  • An agreement confirmed by the courts for a payment plan.

Normally the debtor will pay you after all this. If you still do not get paid, you can again file with the courts for enforcement of their ruling. This means they can do a number of things to ensure you are finally paid:

  • Garnish the debtor’s salary
  • Sell the debtor’s assets
  • In extreme cases, put them in jail
  • It also goes on the debtor’s credit record.

These are quite extreme measures to take, so consider whether it’s in your interests to take them before doing so, particularly if you ever want to do business with the client again at any point.

Also make sure you understand the costs involved in filing your claim, serving the claim and for any other incidental filings. Most of the time, a letter of demand will be enough to encourage your debtor to pay, so costs won’t be a problem.

One more thing: do not feel bad about taking action. You have done the right thing and provided the products or your services, it is the debtor who should feel bad for accepting without paying!