Debt collection methods, Debt collection crises are among the most prominent challenges faced by merchants and commercial institutions, regardless of their size. Such crises can lead to several problems for the company or institution.
One of the most significant risks institutions face in the event of difficulties in debt collection is liquidation or bankruptcy. This situation is exacerbated when clients fail to repay their debts by the previously agreed-upon deadline.
Given the importance of this issue, the law stipulates several methods and means by which debts can be collected and recovered. Therefore, in this article, we have decided to discuss the methods of debt collection, along with the characteristics and implementation mechanisms of each method.
Methods of Debt Collection
Debt is a concern that troubles many, whether individuals or institutions. Although this issue may not be immediately apparent, it requires practical solutions from specialized experts to resolve and collect all debts. Failing to do so can lead to the loss of creditors’ rights and money.
The methods of debt collection are divided into three main categories, each with its own definition, characteristics, and nature that distinguish it from the others. We will clarify this matter in the following lines.
1- Debt collection through amicable settlement:
An amicable settlement is one of the methods through which outstanding debts can be collected from the debtor. It is considered the consensual phase in this process and is defined as “a contract concluded between the insolvent debtor and the creditor, which includes waiving part of the debts, granting extensions to the debtor to pay the debt, or a combination of both.”
This method is usually resorted to when it is confirmed that the debtor cannot pay the debt. It allows the debt to be paid in installments or through any agreed-upon method to collect the full debt.
The debtor can also inform the creditors if they find themselves unable to pay the debt, aiming to reach a solution to settle the debt and avoid legal proceedings. A contract is made with the creditors to settle the matter, while also taking the opportunity to improve financial conditions.
Islamic jurisprudence has acknowledged the practice of amicable settlements for debt collection, which is also supported by statutory law. Both jurisprudence and law agree on the meaning of the settlement. In commercial law, it is defined as “the creditor assisting the debtor to overcome the financial distress they are facing, either by postponing the payment date or discounting part of the debt through a contract concluded between them.” This definition aligns with the one provided in jurisprudence, where the creditor can forgive the debtor the full debt or part of it, easing their burden and offering assistance.
Debt collection methods | The Most Important Characteristics of Amicable Settlement
There are several characteristics that distinguish amicable settlements, based on what commercial jurisprudence has stipulated by considering them a contract. The most important of these characteristics include the following:
- The presence of all the essential elements required in contracts in general, which are: “subject matter, mutual consent, cause, and capacity.”
- The presence of mutual consent between the parties for the settlement to be established. This consent can be verbal or written and may also be implicit.
- The settlement is a contract between two parties: the creditor and the debtor. In cases where there are multiple creditors, it is necessary to obtain the consent of all of them.
Thus, an amicable settlement is one of the most important methods for collecting debts when repayment is not possible. It is also a means of preserving the creditors’ rights. If this method is followed and the debtor fails to make the payment, legal actions can then be initiated, and recourse to the courts may be pursued.
2- Debt collection through the judiciary:
Judicial methods are one of the ways to collect debts from the debtor. This system is designed to protect the well-intentioned debtor from bankruptcy or publicizing this matter. It involves a judicially supervised agreement with the creditors, where the minority must adhere to the majority’s opinion. Additionally, this system helps in keeping the debtor’s commercial enterprise operational.
There are many definitions of judicial settlement, the most important of which are:
- “A procedure applied to a debtor who has stopped paying the debt, whether the debtor is a trader or a legal entity, aimed at working towards debt repayment.”
- “A procedure taken for the benefit of the well-intentioned debtor, provided that they have not committed any serious errors. In this case, the debtor continues to manage their projects and finances to work towards an agreement with the creditors, and an extension for debt repayment is obtained with the creditors’ approval.”
Debt Collection | The Most Important Characteristics of Judicial Settlement
This settlement is characterized by several important features, including:
- Judicial settlement is a collective system.
- It provides protection against the risk of bankruptcy.
- It is a system applied to the well-intentioned debtor.
The nature of the legal settlement
Regarding the legal nature of judicial settlement, there have been various opinions among scholars on this matter. We will clarify these opinions as follows:
– Judicial settlement is a legal obligation:
Some scholars view judicial settlement as a legal obligation. This is because the binding force of the settlement arises from a legal commitment that reflects the desire of the majority of creditors and the debtor, along with the court’s approval of the settlement.
However, it should be noted that in some cases, the court may refuse to approve the settlement, even if the majority of creditors agree. This situation challenges the view that judicial settlement is purely a legal obligation.
– Judicial settlement Judicial ruling:
Some scholars view judicial settlement as a judicial ruling because its binding nature is derived from the court’s approval and is imposed on absent or dissenting creditors, as well as those who agree.
However, this view has been challenged on several grounds:
- The court cannot approve a ruling rejected by a group of creditors or alter the terms of the settlement, whether by increasing, decreasing, or changing them.
- Additionally, it does not account for the fact that the settlement is based on an agreement between the debtor and creditors, which can be annulled if the terms are not fulfilled. If judicial settlement were indeed a judicial ruling, it would not be subject to annulment.
– Judicial settlement contract:
Some scholars view the settlement as a contract concluded between the debtor and the creditors, which is then subject to court approval to protect absent or dissenting creditors. Therefore, the settlement is based on two elements: the first is contractual, involving the agreement between the debtor and the creditors, and the second is judicial, involving the court’s approval of the contract.
The most important conditions for judicial settlement of debt collection methods
There are several conditions related to the judicial settlement process, including substantive and formal conditions. These conditions are as follows:
1- Objective conditions:
– Trader Status: One of the key substantive conditions for a judicial settlement is that the debtor must be a trader. This is because judicial settlement is only applied to traders, whether individuals or companies. However, this system can also be applied to non-traders; it can be used for any legal entity subject to private law.
– Good Faith and Misfortune: Sometimes, a trader may be unable to repay their debts due to reasons beyond their control, which puts them at risk of bankruptcy. In such cases, judicial settlement is one of the best methods to help the trader avoid bankruptcy and continue their business. This, in turn, contributes to the process of debt collection.
– Default on Payment: Defaulting on payment is one of the key procedures in judicial settlement, which is a method for debt collection. Default on payment is based on two conditions: the first relates to the individual’s situation, and the second pertains to the financial status of the company.
2- Formal conditions:
The formal conditions for judicial settlement involve the procedures followed when requesting a settlement to avoid bankruptcy. These procedures are conducted under judicial supervision and occur in two phases:
- The first phase begins with the submission of the settlement request and ends with the issuance of the order to initiate the proceedings.
- The second phase starts with the issuance of the order and concludes with the court’s approval of the settlement.
3- Debt Collection through the Enforcement of Executory Instruments:
Enforcement of executory instruments is one of the methods for debt collection. It is widely known that a debt is due for payment by the agreed-upon deadline. If the debtor fails to pay, recourse is taken to the courts, and a lawsuit is filed, leading to judicial proceedings.
An executory instrument is considered the basis for the right to enforce it, regardless of the type of enforcement, whether it is through attachment or direct execution. Enforcement procedures can only be initiated by the creditor if they possess an executory instrument. The instrument must remain valid until the enforcement is completed.
If the executory instrument is canceled, the enforcement carried out by the creditor loses its basis, and the situation must be restored to what it was before the enforcement.
There are several definitions of the executive instrument, including:
– “Any written document that includes a confirmed right against a person by their acknowledgment, or a judicial ruling against them, or anything similar.”
– “An instrument that can be enforced, and it does not have to be a judgment from a court or any competent judicial authority. It may also be a settlement approved by the court, a notarized contract, an arbitration award, or a commercial paper.”
Elements of compulsory execution
Several elements are required for the enforcement of executory instruments to be valid; otherwise, the enforcement becomes void. These elements include:
- Enforcement Persons: Enforcement Persons means “the enforcement authority – the applicant for enforcement – the person against whom enforcement is being carried out – the third party to whom enforcement procedures are directed.”
- Place of execution: This means everything that is subject to execution. This place must be owned by the debtor and can be seized.
- Enforcement bond.
- Implementation prerequisites: These are the procedures that are carried out for implementation.
Terms of the executive instrument
There are several conditions that must be met for a document to be considered an executory instrument and thus enforceable. The most important of these conditions include:
- The right must be stable and fixed.
- The executive instrument must be issued after the enforcement system comes into effect.
- The executive instrument must not violate the provisions of Islamic Sharia or the state system.
- The instrument must include an obligation to a right, or a commitment to a right.
- The instrument must be for a right of a specific amount.
- It must not be subject to appeal or objection through normal means.
Types of executive bonds
– Judgments and decisions issued by the courts:
These are represented by any judgment issued by a judicial authority in a lawsuit filed based on procedural rules. Thus, this type of executory instrument, as a method of debt collection, has two characteristics: first, it is issued by a judicial authority, and second, it is issued in a dispute between parties.
– Arbitrators’ awards including the executive formula:
Arbitration awards, which are endorsed with the enforcement clause according to the Arbitration Law, are among the most important types of executory instruments. Article 52 of the Arbitration Law states: “If the arbitration award is issued in accordance with the provisions of the Arbitration Law, it has the authority of res judicata and becomes enforceable.”
– Reconciliation minutes from the relevant authorities or those approved by the court:
Settlement agreements are considered one of the types of executory instruments. They serve to resolve any disputes between parties and are a key means of settling conflicts. Through such a settlement, the dispute is concluded. The relevant authorities are those licensed by the Ministry of Justice to perform this task. Additionally, the settlement agreement must be ratified by the court; otherwise, it is treated as a regular document.
– Commercial papers:
Commercial papers are defined as negotiable instruments that can be transferred through endorsement and are payable either on demand or after a specified period. These commercial papers are divided into three categories: “cheque,” “bill of exchange,” and “promissory note.”
Both the cheque and the bill of exchange involve three parties: the payee (creditor), the drawer (debtor), and the drawee (agent in payment). On the other hand, the promissory note involves only two parties: the creditor and the debtor.
– Notarized contracts:
Contracts that are notarized according to the provisions of the Notarial Law are among the most important types of executory instruments. The notarization process must be carried out by authorized entities within the Ministry of Justice.
In conclusion, debt collection is one of the most important processes related to trade and commercial institutions. The methods for collecting debts are varied and numerous, each with its own unique characteristics. Creditors can follow these methods to recover their funds and protect their rights. If you need any legal advice on this matter, you can request a consultation through the website (Request Legal Consultation) or easily contact us on WhatsApp here.