JUNE 2012

The Perils of Ignoring Creditors

Running the Risk When You Owe Money

In light of the difficult economic climate over the past few years, situations in which businesses or individuals find themselves in financial difficulty have become increasingly prevalent. It is often tempting for individuals or business finding themselves in financial difficulty to put such matters “on the back burner” in the hope that the problem will disappear. However, that seldom occurs. Frequently, it is made considerably worse as a result of the legal fees and other expenses for which the debtor becomes liable. Furthermore, creditors who are forced to take legal action to recover debts often adopt a more intransigent stance than they may have adopted had the debtor contacted them with a reasonable proposal at an early stage.

Some recent examples in which we have been involved where the debtor has ended up paying substantially more than the amount of the original debt to eventually resolve the matter include the following:-

• 1. A debtor owed a debt of a little over $3,500. Proceedings were issued. The debtor failed to take any steps to defend the proceedings. Judgment was entered not only for the original amount of the debt but costs, disbursements and interest totalling approximately $2,700. The debtor unsuccessfully sought to have the judgment set aside, resulting in further award of costs and disbursements of approximately $1,500. At this point, the debtor decided to pay the original amount of the debt but not any of the costs or interest that were subsequently awarded. The creditor then initiated bankruptcy proceedings to recover the judgment amount. The debtor eventually paid the amount that had been awarded in the recovery proceedings but also became liable to pay the creditor further costs in the bankruptcy proceedings. The overall outcome was that the debtor ended up paying in excess of $8,000.
• 2. This example concerns a claim for approximately $20,000 in respect of a Payment Claim issued under the Construction Contracts Act. Despite the fact that the debtor had no defence to the claim, he still sought to defend the proceedings in the District Court. The Defendant was unsuccessful and costs were awarded against him. However, under the Act, the creditor was entitled to its actual and reasonable costs and as those costs had not been awarded by the District Court, the creditor appealed successfully to the High Court. Again the appeal was opposed by the debtor. The debtor still refused to pay. The creditor initiated proceedings to effect a sale of the debtor’s home. The debtor eventually repaid the full amount outstanding, the day before his property was due to be auctioned. The total amount that the debtor eventually had to pay to resolve the matter was in excess of $50,000.
• 3. Again this concerns a relatively modest debt of approximately $1,600. The debtor did not make arrangements to pay the debt with the result that the creditor issued proceedings in the District Court. The debtor did not take any steps to defend the proceedings which resulted in Judgment being entered for the amount claimed, together with costs and disbursements, which brought the total amount owed to in excess of $3,500.

Even relatively modest debts have the capacity to spiral out of control. In almost all cases, the debtor would have been in a position to resolve the matter by making a payment of a fraction of the amount that they were ultimately required to pay to resolve the matter had the situation been addressed with the creditor at an early stage.

In the circumstances, if you are in financial difficulty, the best course of action is to address the matter at the earliest possible opportunity. This is when the options for settling the matter are greatest. We are happy to assist in conducting negotiations between debtors and creditors to achieve a mutually beneficial outcome.