What is Debt Collection and Recovery of debtors and defaulters, and How Does it Work in Spain?
Debt collection in Spain is a key factor for any company or freelancer, as poor handling of accounts receivable can lead to severe consequences. Having effective control over clients with outstanding invoices and performing delinquent collections will allow companies to meet financial objectives.
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An optimal tracking of accounts receivable enables understanding cash flow based on clients' invoice due dates, providing the possibility of offering early payment discounts, which encourages clients to pay their debts, thereby minimizing defaults.
The fundamental reason why companies and freelancers extend credit is to increase their client portfolio and sales volume. However, if clients fail to pay promptly within the established timeframe—liquidity issues may arise, potentially jeopardizing the financial stability of the business or freelancer.
This highlights the importance of collecting debts in a timely and efficient manner. Accounts receivable can sometimes exceed 25% of a company’s or business’s assets, meaning that more than a quarter of the funds are not liquid, not available because they have not yet been collected.
For any company, it is essential to implement strategies that help identify delinquent clients and take necessary measures for debt collection. This approach can improve liquidity levels, which in turn ensures the continuation of business operations.
Many business owners and freelancers turn to companies specializing in debt recovery to handle unpaid accounts, either through amicable or legal means, giving them specialized support for debt collection and the necessary time to focus on their business.
Why is debt collection important in Spain?
It is essential to understand that debt collection is a process aimed at obtaining the money owed by clients for a product sold to them or a service provided. Therefore, it is crucial for keeping a business or company running.
If debt collection or collecting from delinquent clients is overlooked, it results in lost revenue, which undoubtedly affects cash flow. Collecting outstanding debt will improve the company’s financial standing. Clients will know there is a more effective collection policy in place and that they are offered plans to settle their debt in the most satisfactory way for both parties.
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How to Avoid Non-Payments
When establishing a business relationship with a client, it is important to set clear and precise payment policies. Therefore, when preparing a quote or contract, you should define:
- Payment date, meaning the invoice due date.
- Full payment amount.
- Payment terms.
- Collection methods, meaning how the client should make the payment.
One option that many businesses and freelancers have adopted is to implement a prepayment policy, which ensures they receive part of the payment before providing the service. This allows them to get to know the client; if the client does not agree to this policy, it may indicate a lack of serious commitment and raise concerns about future non-payments
Techniques for Effective Debt Collection
Collecting outstanding debts from clients in a timely manner requires effective and regular monitoring of invoices. This way, the company or freelancer will know which clients have outstanding debts, when payments are due, if there are unpaid invoices, and if delinquent collection efforts are needed. To achieve this, it is recommended to:
- Maintain accurate records of all invoices: It's important to have software that enables proper invoice tracking, allowing you to know at any time which invoices are overdue, unpaid, or nearing their due date.
- Communicate regularly with clients: Maintaining regular and friendly communication with clients makes it possible to keep them informed about pending payments and due dates. This is also one of the ways to initiate delinquent collections through an amicable approach.
Friendly Debt Collection in Spain
Despite companies or freelancers having an adequate debt collection policy and following it closely, it’s common for unpaid invoices to arise, requiring the collection of delinquent payments. Many companies or freelancers handle these collections independently, while others hire specialized debt recovery services.
In either case, delinquent debt collection initially takes place through a friendly or extrajudicial approach, as it is a more effective, quicker, and economical method. This is an alternative to judicial proceedings, aiming to reach an agreement with the debtor for debt repayment instead of initiating legal action.
A friendly payment arrangement is generally beneficial for both parties, as it allows for the settlement of unpaid debts while maintaining the business relationship with the client. However, there are some key aspects to consider to ensure successful extrajudicial collection.
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The initial unpaid claim should be made cordially, gradually increasing the severity if the debtor does not make the payment. It is advisable to meet with the debtor in person or discuss the matter over the phone to inform them of one or more outstanding invoices.
During the conversation, the debtor may indicate liquidity issues but express a desire to pay as soon as possible. In such cases, a payment plan that satisfies both parties can be arranged, facilitating debt collection without the need for further measures.
If the debtor fails to respond to contact attempts, it’s necessary to leave a written record of the debt collection. This involves initially making the unpaid claim via email, including:
- Creditor’s information
- Debtor’s information
- Debt details, including the due date
- Payment terms and method
If the email claim does not yield the expected results, a certified letter or burofax with proof of receipt should be sent. This formally establishes that a request for payment of the overdue debt has been made. This communication may also indicate that if payment is not made, appropriate legal action will be taken.
In Spain, there is no minimum amount required by law to claim a debt payment. However, creditors sometimes feel that pursuing legal action isn’t worthwhile if friendly collection efforts fail, due to the associated time and financial costs.
This means that, in cases of minor debts, companies and freelancers often opt solely for the extrajudicial route. For larger debts, they may consider legal action if the friendly approach has been unsuccessful.
Advantages and Disadvantages of Extrajudicial Debt Collection in Spain
The extrajudicial route for collecting from delinquent clients has the advantage of allowing unpaid debts to be resolved effectively, quickly, and economically, without the need for judicial proceedings. However, this is only possible if the debtor is willing to pay the debt.
It's important to know that there are many specialized debt collection companies that handle extrajudicial debt collection, allowing business owners and freelancers to focus on their work while experts from these companies manage the collection process for unpaid debts.
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The costs of debt collection services in Spain are reasonable, and in general, they only charge if they succeed in recovering the owed money. Additionally, many of these companies handle the entire process if judicial proceedings are necessary to recover unpaid debts.
However, extrajudicial collection also has some disadvantages, such as:
It is not effective in all cases, as if the debtor is unwilling to reach a payment agreement, judicial proceedings will be required to collect the debt.
Even if a payment agreement is reached, the debtor may fail to honor it, which would also lead to judicial proceedings. Of course, this agreement can serve as key evidence in court.
Recommendations for Friendly Collection of Unpaid Debts
When collecting debts extrajudicially, it's important to consider the following recommendations:
Conduct a financial assessment of the debtor: It is essential to understand who the debtor is and whether they have the solvency to pay the overdue debt. If the debtor is a legal entity, information about their current financial situation should be obtained to understand their liquidity level, as well as to identify their current administrators.
Gather all documentation proving the debt: For debt collection, all information proving the existence of the debt must be collected. This documentation should be referenced in communications with the debtor and attached to any burofax sent. This information is crucial should a judicial process become necessary to collect the debt.
Define a negotiation plan: Once all debt documentation is gathered, the next step is to establish a communication and negotiation plan with the debtor, creating a strategy to advance the negotiation. It’s important to be clear and direct, but also to set a flexible margin, allowing for a payment agreement that is satisfactory for both parties.
Obtain specialized advice: Often, companies or freelancers lack the personnel or time to effectively handle extrajudicial debt collection. In such cases, it is highly recommended to seek specialized advice. Debt recovery companies handle these processes with experienced personnel.
Gathering Evidence for a Future Judicial Process in Spain
All payment demands made through extrajudicial means are valuable and useful evidence if it becomes necessary to pursue debt collection through the judicial system. Therefore, it is crucial to establish evidence for a potential future judicial procedure from the very beginning.
Payment demands should be made in an organized manner, allowing the gradual collection of useful information that will prove the existence of the debt and the debtor's acknowledgment of it.
It's important to highlight that the extrajudicial debt collection process in Spain should ideally be handled by specialized professionals to ensure it does not harm a future legal action.
Although the purpose of extrajudicial collection is to avoid the need for judicial proceedings to collect from delinquent clients, it’s essential to consider the possibility that the friendly approach may not yield the desired results, making a judicial process necessary. It’s best to have as much evidence as possible.
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Undoubtedly, the extrajudicial or friendly approach can be very effective and less costly than pursuing unpaid debts through the courts. However, if it does not achieve the expected results, it should at least serve to gather evidence that will support a successful judicial procedure in the future.
Are Debt Collection Companies a Good Option in Spain?
Companies and freelancers often turn to debt collection companies for various reasons, including:
Cost savings: The time, personnel, and resources required for collecting unpaid debts can represent a significant cost for businesses. Hiring a specialized debt collection company can be a good option, as they handle the entire extrajudicial collection process for a manageable fee.
More time availability: Business owners and freelancers prefer to focus their efforts on growing their businesses and making them more efficient. Dedicating time to debt collection distracts from their primary objectives, so leaving the task to a debt collection company allows them to concentrate on their core responsibilities.
Additionally, a debt collection company may offer to purchase the debt, providing the business with a substantial portion of the total amount owed. The collection company then takes on the role of creditor, freeing the original business or freelancer from the task of collecting the unpaid debt.
Of course, the amount recovered by the business is usually less than the original debt amount. However, in many cases, this is a satisfactory solution that allows for the recovery of a portion of the debt.
Legality of Debt Collection Companies in Spain
Debt collection companies in Spain act as intermediaries between the creditor (company or freelancer) and the debtor, with the goal of recovering the amount owed. In Spain, there is no specific legislation governing the activities of these companies, so their operations are limited by the provisions in:
- The current Civil Code
- The Consumer Protection Act
- The Data Protection Act
- Other laws and regulations
A company has the authority to share an individual’s information with a third party, in this case, a debt collection company, for the purpose of recovering unpaid debts. Organic Law 15/1999, of December 13, on the Protection of Personal Data, in Article 12, allows third-party access to an individual’s personal data.
Thus, a debt collection company acting on behalf of a creditor can access the debtor’s information to proceed with debt collection, as long as it respects the limits established by this law. This requires:
A written contract between the creditor and the debt collection company.
A contract (written or verbal) in which the debtor consents to the processing of their information by the company with whom they have a business relationship.
Additionally, all activities undertaken by the debt collection company to recover unpaid debts must comply with data protection regulations. This means the debtor's information should only be used to collect the overdue debt, without violating the confidentiality and privacy of their personal data.
Similarly, the activity of purchasing a debt and assuming the role of new creditor is legal. However, it is necessary to inform the debtor of this change in a timely manner.
Resorting to Legal Action for the Collection of Outstanding Debts
Collecting debts through legal channels is a process in which the creditor seeks to recover an amount of money owed that has not been voluntarily paid by the debtor. This route is usually taken when all extrajudicial efforts have been exhausted, and a resolution is sought through a competent court.
Characteristics of Debt Collection via Legal Proceedings:
Formality of the Process:
Debt collection claims are filed through a formal legal demand presented before a competent court. This requires drafting and submitting the relevant legal documents, which must meet the format and content requirements established by applicable laws.
Involvement of Judicial Authorities:
The legal procedure for collecting unpaid debts is overseen by a judge who reviews the evidence presented by both the creditor and the debtor. The judge then determines whether the debtor is legally responsible for the claimed debt.
Presentation of Evidence:
The creditor is obligated to provide evidence supporting the existence of an overdue debt, such as invoices, delivery notes, promissory notes, and written communications that substantiate the claim. It is also essential to include any payment agreements that the debtor has failed to honor.
Legal Procedure:
Depending on the amount of the debt, different legal procedures can be used, each with its own set of rules and processes.
Right to Defense:
Every debtor has the right to a legitimate defense against debt collection through legal channels. They may present their own evidence and arguments in the case.
Judicial Resolution:
The judge concludes the process by issuing a ruling, which may order the debtor to pay the claimed amount, along with accrued interest and legal costs.
Enforcement of the Judgment:
If the ruling is in favor of the creditor and the debtor fails to voluntarily pay the debt, the creditor may initiate an enforcement procedure, which may involve the seizure of the debtor's assets or bank accounts.
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Factors to Consider Before Resorting to Legal Action for Debt Collection
Exhaustion of Extrajudicial Means:
As mentioned, it is advisable to exhaust extrajudicial means before pursuing legal action. Beyond the possibility of recovering the debt, this approach can help gather valuable evidence that will support the legal process.
Strength of the Claim.
For a successful legal claim, it must be well-founded, including.
Documentation proving the existence and amount of the debt, as this will form the basis of the claim.
Legality of the Debt: The debt must be overdue and legally enforceable. Additionally, the statute of limitations for claiming the debt should not have expired.
Debt Amount:
Before pursuing legal action, assess whether the amount of the debt justifies the legal costs and the time required for the process. In some cases, the cost of the process may exceed the debt amount.
Debtor's Payment Capacity and Solvency
Consider the debtor's ability to pay and solvency before pursuing legal action. It is advisable to ensure the debtor has sufficient income or assets that can be seized to cover the debt amount.
Statute of Limitations:
It is crucial to act while the debt remains legally enforceable. In Spain, the general statute of limitations for debts without a specific expiration date is five years, counted from the moment the obligation becomes enforceable (Article 1964.2 of the Civil Code currently in force).
