Getting the money you’re due can be challenging, especially when debtors ignore the invoices you send. Once you realize that ordinary approaches aren’t going to produce the results you want, you may decide to move forward with more pointed collection attempts.
One of the first steps in this process involves crafting and sending a demand letter. This is a very specific document that should be prepared with a professional tone.
What does a demand letter do?
A demand letter is a written notice that informs a debtor that they are obligated to repay a specified debt to your company. This communication must be clear and concise and contain specific information, including the amount of debt, the origin of the debt and a specified time frame for repayment.
It serves multiple legal purposes:
- Acts as a formal reminder to the debtor of their obligation
- Provides legal proof that the debtor has been informed of the debt
- Sets the stage for potential legal action if the debt isn’t repaid within the stipulated time period
Drafting a demand letter is a critical step in your company’s collection process. It must balance firmness and professionalism, clearly stating the consequences of nonpayment without violating consumer protection laws. In addition, depending on whether the debt is commercial or consumer debt or student loan debt, there are very different statutory requirements of elements that must be included in the initial demand letter.
Strategic considerations for your company
From a strategic standpoint, demand letters can serve as a cost-effective method for debt recovery. Before initiating costly and time-consuming legal proceedings, a well-crafted demand letter often prompts the debtor to settle the debt. It also allows the debtor to communicate with your company, potentially leading to a negotiated settlement or payment plan that avoids court altogether.
The effectiveness of a demand letter can be influenced by several factors, including the tone of the letter, its timing and the credibility of the threat of legal action. You must ensure that their demand letters are legally compliant and tailored to the specifics of the debt and the debtor’s circumstances.
Demand letters must comply with all applicable laws. Since these are often used as a precursor to legal action, having your attorney assist with the preparation can be beneficial.