What is Debt Collection? The Importance of Legal Debt Collection

In the current context of a developing market economy, transactions and trade are increasingly common, and one of the notable issues is the emergence of debts in these transactions. When an enterprise sells goods or provides services, customers may not pay immediately, which leads to debts and can affect the cash flow and operational capability of the enterprise. Therefore, Debt Collection becomes a necessary task to ensure that the enterprise has enough financial resources to maintain operations and grow. Effectively managing debts and Debt Collection not only helps improve the financial situation of the enterprise but also strengthens customer relationships through reasonable and professional resolution measures. However, a difficult question for enterprises is how to ensure effective Debt Collection while complying with the law? The article What is Debt Collection? The Importance of Legal Debt Collection below will provide readers with an objective and comprehensive view of Debt Collection and the role of Legal Debt Collection.

1. Concept of Debt Collection and Legal Debt Collection

Debt Collection is the process by which an enterprise or individual seeks to recover money that customers or partners owe for goods purchased or services used but have not yet paid for.

Legal Debt Collection is the method of recovering debts by following legal regulations. It relies on the terms of the contract or other agreements signed between the parties to compel the debtor to fulfill their obligation to pay the debt. This method involves binding and enforcement measures, including litigation, legal proceedings in court, or collaboration with authorities to compel the debtor to meet their payment obligations.

2. Common Debt Collection methods

In fact, there are many different methods of Debt Collection that are applied depending on the specific situation, the scale of the debt and the level of cooperation of the debtor. Here are some common methods of Debt Collection:

2.1. Methods of illegal Debt Collection

Usually, because of the psychology of anxiety and insecurity when the money is not paid in full and on time, creditors will tend to put pressure on the debtor by illegal methods. However, this can be “counterproductive”, even causing bad consequences for people with debts in need. Some common ways of Debt Collection that are not in accordance with the provisions of the law can be mentioned as follows:

• Threatening the debtor illegally: When a creditor uses one of the following behaviours, it can be determined as a violation of the law: threatening to kill; threatening to commit acts of infringing on health and body; threatening to infringe on private life secrets: images and clips with sensitive content; threatening extortion, extortion of property, …

• Arresting, detaining, holding, beating, squeezing the debtor’s assets: This is an illegal method of Debt Collection. Even this kind of behaviour can be enough to constitute a crime such as: illegal detention; the crime of extorting property; the crime of humiliating others; the crime of intentionally causing injury,…

In any case, creditors do not have the right to arrest, detain, beat, humiliate, or squeeze property to collect debts. If these things are done, creditors may be prosecuted for criminal liability for the corresponding crimes. At that time, the creditor becomes the offender, the debtor becomes the victim.

• Hiring a debt collection organisation for hire: Debt collection service business is one of the prohibited activities according to the provisions of the Law on Investment 2020. However, in fact, this is still a popular “trusted” unit due to its efficiency and speed. These organisations operate very professionally in debt collection, with a clear assignment of functions, tasks and implementation plans. Some common debt collection methods include constantly calling to pressure; threatening relatives; directly threatening the debtor’s workplace or house; even collage images and threats with sensitive and untrue information,…

Although being quick in debt collection, the above-mentioned acts can seriously violate the provisions of the law and have the opposite effect on creditors.

2.2. Debt Collection through negotiation and settlement

When choosing Debt Collection through negotiation, settlement requires the implementer to have experience, in-depth legal knowledge, analytical skills and settlement skills so that the negotiation brings convenience to both parties. The negotiation and settlement of Debt Collection do not need to be influenced by a third party or jurisdiction but only in the spirit of voluntariness, goodwill and cooperation of the parties.

When applying  the method of Debt Collection by negotiation and settlement, creditors will often call, send debt reminder emails, and send letters requesting debt payment. Normally, this method of Debt Collection will go through 3 stages: reminder, urgency and warning.

Reminder stage: At this stage, individuals and enterprises can use communication methods such as email, text, and phone to show a peaceful, gentle but no less resolute attitude by extending the payment time in a specific and reasonable way to request the debtor to perform the obligations signed in the contract.

Urgency stage: If the debtor still does not make the payment after the reminder, individuals and enterprises will gradually increase the frequency of reminders to emphasise the debtor’s obligation to pay even though they still maintain a goodwill attitude.

Warning period: After the above stages have been implemented, but the debtor still does not take positive actions, at this time, individuals and enterprises can begin to take stricter and stronger warning measures. Specifically, based on the contractual agreement between the parties and the provisions of civil and commercial law, the party has the right to request the party with the obligation to pay to properly perform its obligations, if the debtor fails to perform, it may have to suffer legal consequences.

2.3. Legal Debt Collection

As mentioned above, Legal Debt Collection is a form of debt collection by complying with the provisions of the law. Based on the terms of the contract or other agreement signed between the parties to force the debtor to perform the debt repayment obligation.

Legal Debt Collection methods include: Initiating a lawsuit or denunciation through court proceedings or coordinating with the authorities to force the debtor to perform the debt repayment obligation. This method is often applied to doubtful debts (bad debts) because it is necessary to take temporary emergency legal measures to prevent the debtor from shirking the performance of obligations.

Legal Debt Collection is usually carried out after the creditor has applied all good-faith and peaceful measures but the debtor still does not have a cooperative attitude. The following contents will further analyse The Importance of Legal Debt Collection.

3. The Importance of Legal Debt Collection

Legal Debt Collection is the last and most powerful measure a creditor can use to ensure the debt is paid. Legal Debt Collection offers the following benefits:

• Creating strong pressure on the debtor: Being sued and potentially facing a court ruling creates great pressure on the debtor. Not only does this affect their finances, but it can also cause damage to the debtor’s reputation, which in turn motivates them to find a way to pay off their debts.

• Enforceability: If the debtor does not voluntarily enforce the Court’s judgment, the creditor can request coercive measures to require the debtor to pay the debt. Specifically, as follows:
  • Asset freezing and seizure orders: The court may issue a decision to freeze the debtor’s assets, preventing the transfer or disposition of these assets. This ensures that the debtor’s assets will be retained to pay the debt.
  • Bank account blockade: The bank account blockade measure of the debtor aims to deduct money to pay the debt. This is an effective enforcement measure, especially when the debtor has a stable cash flow.
  • Coercive sale of assets: In case of necessity, the Court may issue a decision to coercively sell the debtor’s assets to obtain money to pay the debt. This can include selling a house, vehicle, or other valuable property.

• Ensuring transparency and fairness: The Legal Debt Collection process is open and transparent under the supervision of the Court and competent authorities, ensuring that all actions are in compliance with the law and that the interests of both parties are protected.

• Protecting the interests of creditors: Initiating a lawsuit to the Court to require the debtor to pay the debt brings many important benefits to creditors. When there is a judgment from the Court, the debtor is forced to comply, otherwise, measures to ensure judgment enforcement will be applied to ensure the enforcement effect of judgments and decisions, ensure the severity of the law, and ensure the legitimate rights and interests of the parties.

However, when applying the Legal Debt Collection method, individuals and enterprises need to pay attention to the issue of time and cost. Legal procedures often take a long time, from filing a lawsuit, organising a first-instance court hearing, to issuing a judgment and enforcing the judgment. This process can take months or even years. In addition, Legal Debt Collection requires significant costs, including attorneys’ fees, lawsuit filing fees, and other related costs. This cost can be a burden for creditors, especially when the debt is not large. Therefore, depending on each specific situation, individuals and enterprises  choose the appropriate Debt Collection method, ensuring compliance with legal regulations.

Debt Collection is an indispensable part of business activities and financial management, ensuring that individuals and enterprises maintain stable cash flow and avoid financial risks from debts. Among the methods of Debt Collection, Legal Debt Collection stands out as a powerful and effective tool, especially when other measures do not yield the desired results.

The above is an overview of What is Debt Collection? The Importance of Legal Debt Collection. If you have difficulties in finding a Law Firm to advise and support in the relevant legal field, please contact us. Phuoc & Partners is a professional consulting firm established in Vietnam and currently has nearly 100 members working in three offices in Ho Chi Minh City, Hanoi and Danang. Phuoc & Partners is also rated as one of the leading consulting firms in Vietnam with highly specialised teams in top legal fields such as Labour and Employment, Taxation, Merger and acquisition, Litigation. We are confident in providing customers with optimal and effective service.