How to recover bad debts from customers

8th June 2018

In a survey by Company Check, it was found that an astonishing 80% of UK small businesses are owed money. The survey also found that 68% of small businesses have had to write off bad debt.

With a so many small businesses collapsing as a result of late payments, this is clearly a massive obstacle to overcome if you want your business to be a success.

It is important to bear in mind that if no acknowledgement or payment has been made by the debtor within six years, the debt will become unenforceable under the Limitations Act, meaning you cannot take legal action to recover it.

If you are a DAS customer, you have access to a number of guides and templates that could help you get your money back without needing to go to court, including template letters for chasing overdue payments, on DAS Businesslaw.

Debt recovery documents How to register

How to recover a debt

There are several traits in the behaviour of potentially tardy customers that should set alarm bells ringing should you notice them. These include:

  • They are difficult to contact; your letters, e-mails and phone calls are beginning to go ignored
  • They are reluctant to negotiate payment schedules
  • They break their promises to make payments
  • They start to get excuses in early, e.g. by complaining about services or contracts

By identifying potential problem debts early, you will save time and money spent chasing bad debts further down the line. But when you find it’s too late and the debts are starting to get out of hand and causing you massive inconvenience, it might be time to call in the services of a solicitor or a professional debt recovery firm (bear in mind that most businesses give late-paying clients 90 days before referring their case to a third party, so it may be advisable to follow this lead).

Debt collection agencies

Debt collection agencies can send out a strong message, but be careful if you choose to take this option – you don’t want to scare off your biggest customers completely by appearing quick to threaten legal action.

Debt collectors also frequently charge a percentage of any payments collected on top of their regular flat fee, so be careful not to end up paying more than you had expected or your attempt to prevent a loss of profit could merely incur you further charges.

Arguably a safer and more cost-effective method of debt recovery is to engage the services of a solicitor. Just one letter or phone call from a solicitor can spur a debtor on to making a swift payment for fear of further legal action.

Debt recovery through court

Court action should always be a last resort due to the time and money involved. You should also make sure that the debt is substantial enough to warrant going to court, as it may be more cost-effective to simply write off the debt.

You should ensure that all disputes which may have been made about the goods or services that you have provided have been resolved before going to court – otherwise the chances of recovering the debt drop will significantly.

You need to make sure that the customer has the means to pay the debt. If they are bankrupt or their company is in liquidation the debt is likely to be stricken off.

There are several different ways in which you can make a debt collection claim. Firstly, if your debt is under £200,000, you can apply through the Money Claim Online service (run by HMCS a government website) which was put in place to help business owners make or respond to claims over the internet.

If the debt is under £10,000 it can be made through the small claims track of the County Court. For debts over £100,000, claims will need to be made in a high court.

Usually the threat of court is enough to get debtors to pay up. However, sometimes you may have no other option then to go forward with court proceedings.


Mediation could help you reach an agreement with your debtor to settle the debt without having to spend extra money on court action.

Late payment

Late payment legislation allows you to charge late payer’s interest and any costs incurred for debt collection, but it is up to you to implement these rights.

When is a payment considered late?

The law states that late payment legislation comes into force 30 days after having been invoiced or having goods delivered for public authorities and 60 days for business transactions, however a lot of businesses have a different way of working than this. You can agree a credit period with your customer in writing or, in a lot of cases, the credit period can be up to 60 days, starting from the date the invoice was sent and concluding at the end of the following month.

Charging interest on late payments

By law, you can charge interest on any late payments if the debtor is another business. This is not only a statutory right but can also be contractual. It is up to you whether you decide to implement this law and to consider whether it would be right for your business to operate in this way.

However, you cannot start charging interest immediately if the debtor is a consumer. If you wish to charge interest to a consumer over a debt, you will need to state this in any Letter Before Claim, as well as including an interest calculation on a Particulars of Claim which is sent with a county court claim form. The court can award you statutory interest if this is done and you make a successful claim against the debtor – however, the court may not award the interest you have calculated if it is considered to be excessive.

How much interest should I charge?

There are two different ways to calculate how much interest you should charge on a late payment. The first is the statutory rate which is the Bank of England base rate plus 8%. This is set for 6 months and will then be reassessed. The second is contractual rate which you can set as higher or lower that the statutory rate. You should charge income on the gross amount of money owed including any VAT.

How to charge interest on late payments

If your company does not already charge interest on late payments then there are some important changes that you will need to make if you decide to start charging. You will need to make sure that your customers are aware that if they pay late, they will be subject to paying interest; this should be done in writing and in your terms and conditions. You may also have to change your credit management and billing systems.

It is important to make sure that any invoices sent out have a clear payment date on them to ensure that your customers are aware of the time in which they have to pay. If payment is late, you should consider sending out a final warning before interest starts to be charged. It is also a good idea to let your customer know that they have begun to accrue interest on a debt. You should also include the fact that you have the legal right to charge interest and for any debt recovery charges that they might incur. When the customer does pay off the debt, including the interest, a receipt should be issued explaining how interest was charged.

How to charge debt recovery costs

Debt recovery costs are set and are as follows:

  • debts up to £999.99 = £40
  • debts from £1,000 - £9,999.99 = £70
  • debts of £10,000 or more = £100.

As with charging interest on late payments you should think carefully before applying a debt recovery charge to ensure that it would be beneficial for your business. If you decide to go ahead with the charge, the customer should be notified in writing and a new invoice should be drawn up.

Statutory Demands

A statutory demand is a written formal request for a debt to be paid. Once the demand has been made, the debtor has 21 days to respond. They must either settle the debt or come to an agreement about how the debt will be recovered.

The creditor may present a petition for bankruptcy against any individual if the debt is over £5,000 or wind up a company that owes £750 or more. If the creditor has a court order that the money must be paid, they can send bailiffs to the home or business premises of the debtor to recover their debt. If the cost of the debt is not recovered the creditor then has the right to petition for bankruptcy. You have a 4 month time period to submit an application for bankruptcy or to wind up your debtor.

A statutory demand can only be served on debts that are less than 6 years old, and does not expire.

Serving an individual or sole trader

The most important factor when serving a statutory demand to an individual is the way in which you serve it. You need to ensure that the debtor is aware that they are receiving a demand. It is advisable to serve the notice in person so that you can prove how and when you served the notice. If this isn’t possible you can hire a process server who will do it on your behalf. If you can’t get hold of the debtor you can post the letter by 1st class post or by putting it through the letter box. If you go on to petition for bankruptcy you will have to ensure that you can prove how you served the demand and when you believe the debtor would have seen it. Alternatively you can advertise the demand in a newspaper. This can only be used as an option if the debtor has changed address without informing you or is actively avoiding you.

Serving a registered limited company

You can serve a registered company either by delivering the demand in person to their registered offices or by sending it by recorded post. The demand will be noted as served as long as the company signs for it.

Serving an unregistered limited company

To serve on an unregistered limited company you can deliver the demand to their main place of business, or any senior officer of the company. The court may also direct you in the way in which to serve the demand.

You will need to have filled in the correct forms to serve a statutory demand and you will also need to provide proof of service.

What your statutory demand should contain

When you present your debtor with a statutory demand you should ensure that it includes information regarding why they have been served and the consequences of not conforming to the demand. You should also indicate that they have the right to apply for the demand to be set aside. It must include contact details of someone they can contact to discuss their debt.

An authorised person must sign and date the demand. The main body of the demand should state when the debt must be repaid, how much debt is owed and what products or services it arose from, along with details of the unsatisfied judgment or failing this, why you believe the debtor will not be able to pay the debt.

Certificate of Service

You will need to prove that you have served the statutory demand in order to ensure that it is upheld, or if you want to file a petition for bankruptcy. To petition for bankruptcy you must also include a certificate of service, which proves that the person was served the statutory demand.

This needs to be supported by a statement of truth, which must be signed by the person who served the demand, unless the debtor acknowledges that they were served, in which case it can be signed by any authorised person.

If you served the debtor personally then you will have to fill in Form 6.11 but if you used a different method to serve the demand you will need to fill in a Form 6.12, which details the date and how the demand was served.

If the demand was not served personally and the debtor is refusing to acknowledge that they have received it then a person who served the demand or issued it to be served should write the statement of truth. This will have to explain how and when the demand was served and the date in which they believe the debtor would have received it.

It is important that you carry out the serving of the demand correctly as if the court believes that it was not served in a proper manner they may dismiss your petition for bankruptcy.

Serving a statutory demand abroad

You can serve a statutory demand abroad in the same way that you would in the UK, other than the fact that the debtor has 28 days to comply as opposed to 21. If you wish to go on to petition for bankruptcy, however, there are some restrictions.

People living and conducting a business in the EU will not be subject to bankruptcy petitions if they are earning a living in that country (this excludes Denmark). If the person you wish to file a petition for bankruptcy against is retired or unemployed then they will have to be made bankrupt according to the law of the country where they reside.

Finally, if the debtor lives outside the EU (or in Denmark) you can file for a bankruptcy petition as long as they have lived in the UK within 3 years before you wish to serve the notice. The only exception to this is if you are able to serve the person on a day that they are in England or Wales.

If you have obtained a court order then you may not have to serve a statutory demand. You can ask the court to enforce the order but if they fail you can serve an application to wind up a company if the debt is over £750.

If You Receive a Statutory Demand

Statutory demands should not be ignored. In ignoring a demand you leave yourself vulnerable to being made bankrupt or having your company wound up. You must react to a statutory demand within 21 days by either paying off the debt or agreeing a payment plan with your creditor.

If you disagree with the demand you have 18 days in which to apply for it to be dismissed (set aside) unless you live abroad, where you will have 22 days to apply. You must fill in form 6.4 and 6.5 and return it to the court in which you would present your own bankruptcy petition. If your demand states that the petition will be presented in a High Court, you will need to apply to a High Court.

The deadline for you to act on the statutory demand pauses as soon as you make an application for it to be set aside. There must be a legitimate dispute surrounding the debt for the court to grant the application. As long as your application is not dismissed immediately, the court will fix a date for the hearing and inform all parties involved.

If the court decides to dismiss your application the date in which you must comply with the statutory demand will be reset.


If your company is served with a statutory demand you do have the right to apply for it to be set aside. As long as you have a valid reason as to why you believe it should be set aside you can prevent the creditor from applying for your company to be wound up.

Need more help?

DAS UK customers have access to templates and guides on, including template letters for notifying customers of debts and more guides on what action you can take.

You can access DAS Businesslaw by using the voucher code in your policy provider’s documentation.

Visit DAS Businesslaw Registration guide

Disclaimer: This information is for general guidance regarding rights and responsibilities and is not formal legal advice as no lawyer-client relationship has been created. Note that the information was accurate at the time of publication but laws may have since changed.

4 things you need when you run a business from your home

Running a business from your home could make it easier to balance your home life with your work, but there are a number of extra rules that you will need to consider.

March 2021 Learn more
6 tips for giving your business a “spring clean”

As we slowly exit lockdown, this is the ideal opportunity to spend some time giving your business a ‘spring clean’. Hayley Marles has six tips for a clean and tidy SME.

July 2020 Learn more
Who to contact when your business is defrauded

William Ellerton shares some general advice on the first things a business should do if they believe they have been defrauded.

January 2019 Learn more

Read more from the DAS Law blog

General advice , Protecting your business 5 things you need to know about missing the self-assessment tax return deadline

With 31 January deadline fast approaching, time is ticking for the UK’s 5.4m tax payers to submit their Self-Assessment tax returns.

January 2024
Protecting your business , Goods and services disputes , Covid-19 What you need to know about hospitality, Covid, and new Health and Safety rules

In light of Covid-19, health and safety rules have changed and venue owners, event organisers and attendees need to be up to speed.

June 2022
Protecting your business , Running a farm Fly tipping: what you need to know

Fly-tipping is the only crime where the victims (private landowners) have a legal responsibility to dispose of the waste. Mark Woodman looks at the laws around this modern day scourge.

July 2021
Accidents at work , Protecting your business , Running a farm How to keep your workers safe during Farm Safety Week

Mark Woodman, Solicitor at DAS Law, looks at what farmers are legally required to do to keep both themselves and their workers safe.

July 2021
Employment disputes , Growing your business , Protecting your business , Setting up a business , Running a farm Farming tenancies: what you need to know

Mark Woodman, Solicitor at DAS Law, looks at what farmers need to know regarding a Farm Business Tenancy.

June 2021
Protecting your business , Running a farm Farms and trespassing: know your rights

Mark Woodman, solicitor at DAS Law, looks at what farmers need to know about trespassing.

June 2021
Employment disputes , Protecting your business How to keep your staff and customers safe when re-opening your business

As the country continues taking steps toward a return to normal, Covid restrictions remain in place in order to allow the reopening process to be conducted as safely as possible.

June 2021
Employment disputes , Protecting your business The return to work: a guide for employers

Molly-Ellen Turecek looks at what employers need to consider when returning employees to work.

May 2021
Employment disputes , Protecting your business , Covid-19 The Return to Work from Covid: How businesses can stay on the right side of the law

Although lockdown restrictions are easing for many businesses across the country, health & safety and social distancing measures still apply.

May 2021
Protecting your business , Setting up a business 4 things you need when you run a business from your home

Running a business from your home could make it easier to balance your home life with your work, but there are a number of extra rules that you will need to consider.

March 2021
Growing your business , Protecting your business , Setting up a business How to make business decisions ‘virtually’

The Covid-19 pandemic and social distancing bought into sharp focus the need for all organisations to consider their decision making processes.

January 2021
Employment disputes , Protecting your business 6 tips for giving your business a “spring clean”

As we slowly exit lockdown, this is the ideal opportunity to spend some time giving your business a ‘spring clean’. Hayley Marles has six tips for a clean and tidy SME.

July 2020
Employment disputes , Protecting your business Health and safety and computers

Employers need to manage the risks to their employees of working at computers for long periods of time. DAS Law’s Bethan Mack explains.

May 2020