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Follow the Money: Navigating Debt Collection

*Please note that School of Scheff is not legal advice and should not be taken as such. School of Scheff provides legal information which is specific to the Province of Alberta. Should you reside outside the Province of Alberta, please contact a lawyer in your jurisdiction with any legal queries as the laws across the Canadian provinces vary widely.*

The scenario: you find yourself in a situation where you are owed money. This may be in your business or it may be in a personal capacity. No matter what happened, you find yourself in a situation where someone owes you money. What can you do about it?

This is one of the most common legal problems that I see and it can be one of the most frustrating to try and solve. One common misconception is that debt recovery and the legal process will be fast. The speed at which your problem resolves usually depends on two things: 1) the two adverse parties involved; and 2) the complexity of the legal issue involved.

The Crucial Role of the Paper Trail

There is a saying that I like to use: the closer you are in relation, the better the transaction should be papered. Read that again. The worst kind of conflict is conflict within families. If you lend a loved one money, always make sure that you paper that in some way. There are varying degrees to which that can be accomplished, with varying levels of security, but the best is having some version of a legal document such as a loan agreement or promissory note. It doesn’t have to be complicated. The worst is not papering it in any fashion and not discussing repayment or interest expectations. This is because when you do end up having to take legal action, there is very little objective evidence of the debt and it becomes more difficult to establish the facts of the case.

We don’t like to think that we’d end up in a situation where the loved one fails to pay us back, but this situation is more common than you think. Think of it like insurance: you don’t plan for your house to burn down, but when it does, you’re sure glad you had insurance. There are many different ways to evidence debt and paper these kinds of transactions. A bit of money up front to paper it correctly, can save you thousands in legal fees later trying to collect.

Information is Power

Now you’re in the situation now where you need to take steps to collect the money owed to you. What are your options?

When this type of file crosses my desk, the first thing that I do is get all of the information that I possibly can about the situation. This is a crucial part of the process because certain facts can radically change my opinion about your legal position and affect my ability to align you with the result you’re looking for. I always expect that there will be some sort of wrinkle in the facts, as most cases have, but no matter how positive or negative the fact, it’s vital you tell me everything. The good, the bad, or the ugly. Withholding information from your lawyer is not something you want to get in the habit of doing – especially if it hurts your case. One way or another that fact will come to light and I’m not not going to be pleased if I’m blindsided by it after the fact.

The types of questions that I typically ask are:

  • Who are the people involved?
  • What happened? How did we get to this stage? What steps did you take to “paper” the loan, if any?
  • Over what period of time did this occur? When did the money get loaned? Were there any partial payments or acknowledgements of the debt owed?
  • Where did this occur?
  • What was the purpose of the loan? Why did you decide to loan the funds in the first place?

Choosing Paths

After I have all of the information, I begin assessing your legal position and how likely it is that you may be able to recover funds. Unfortunately, there is no way to guarantee that you’ll get repaid, because of the way our system works. This is because once you obtain a judgment, you still have to collect on that judgment. The success of your collection efforts depends on the debtors assets, ability to pay, and sometimes, a little bit of luck. The reality is that if the debtor has no money and no assets, you end up with an “empty” judgment – which is a judgment that you can’t collect on.

One of the first things I suggest when this type of file crosses my desk is to send out a demand letter demanding payment of the debt and providing a timeline to do so. Sometimes the demand is all that’s required, but the unfortunate reality is that the demand often goes unanswered. At that point we have to evaluate whether you want to proceed with filing a claim with the Court or with proceeding with an out-of-Court dispute resolution method such as mediation or arbitration. If you proceed with the Court route, most claims end up settling somewhere along the way and very few end up making it to a full trial. Settlement is usually the most cost effective way to proceed with litigation, but sometimes the parties are too far apart in their positions to make settlement work.

Being owed money can be very frustrating and recovering the funds owing can feel daunting, but engaging legal counsel can make it less so. Whenever possible, invest in clear documentation upfront to aid in the debt collection process in the future. Documentation may not prevent the default in the first place, but it can make it much easier to prove the debt exists and not only that, the key terms on which the money was loaned.

About the Author

Charlene Scheffelmair is a partner with Davidson & Williams LLP in Lethbridge, Alberta. She practices primarily in the areas of corporate and commercial law; residential and commercial real estate; estate administration and planning; and foreclosures.

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