Circumstances Affecting Collections Beyond Creditor’s Control
Collecting bad debt in Latin America often represents a challenge for foreign businesses.
There are several reasons to mention why businesses stop paying, which may be considered universal: bad economic circumstances, a company having liquidity issues, bad luck in business, mismanagement, and even bad intentions can be reasons causing bad debt anywhere one goes and does business.
However, there are a couple of circumstances which, maybe not exclusive to Latin America, do periodically characterize Latin American societies and economies, and therefore, affect businesses and ultimately also the collection of bad debt.
We will briefly discuss four of such circumstances.
Political Instability Causing Economic & Monetary Issues
Although this may vary substantially from country to country, and even within countries from region to region, political instability has been a common phenomenon in Latin America. Political instability may be visible through weakness of institutions, corruption, and policies imposed by the State contrary to the interests of the population, resulting in amongst others a lack of diversity in economy, underdevelopment in rural regions and impoverished urban areas, insufficient infrastructure, currency exchange controls and import / export tariffs in an attempt to protect the own economy. Political instability generally tempers economic growth and development and foreign investment. All these elements ultimately negatively affect the position of businesses, whether these are big corporations or small enterprises. Payment behavior may deteriorate and collecting bad debt may become more difficult. Countries like Argentina, Brazil, Venezuela, Mexico, Colombia, Ecuador, amongst others, have all been faced with some of these or similar issues.
Malfunctioning Judicial Systems Limiting Recovery of Bad Debt
Apart from a few exceptions, the legal systems in Latin America can in general be considered little accessible to foreign creditors.
From a foreign creditor’s point of view, judicial systems in Latin America can be perceived as complex, inefficient, closed minded, and incompatible. Often, there are no treaties in place between countries. This means that cross boarder issues are subject to local law in Latin America and the debtor’s jurisdiction applies if a foreign creditor wants to enforce payment of bad debt legally. In practice however, foreign claims are tough to enforce reducing the likelihood for collection and leaving the creditor with high, often unrecoverable legal expenses.
Infrastructure Missing Key Elements for Doing Business Globally
In several regions of Latin America, businesses are faced with a lack of infrastructure. This may include proper roads or airports, but also limited banking services and payment options, undeveloped educational institutions and professional support services, weak or absent authorities and limited or no access to the internet. Such business may be perceived as remote and difficult to reach for foreign creditors. Collecting bad debt can become a real challenge if debtors in more remote areas do not cooperate.
(Semi-)Informal Character of Business Preventing Sustainable Growth
The nature of doing business in Latin America can be very informal. This may allow a business to function locally but can cause issues when business is done internationally. For foreign creditors, the shadow side of the level of informality of businesses in Latin America can include: questionable financial management on the side of the debtor, limited options for local businesses to pay internationally, limited or no access for debtors to credit, and the fact that many business with a high level of informality are run based on a day to day strategy, without a long term vision. Because of this, the debtor lacks sustainable growth, which ultimately affect the creditor’s likelihood to collect bad debt.
In this post I mentioned four circumstances that may negatively affect collection of bad debts and which are typical for doing business in Latin America: economic downfall caused by political instability, malfunctioning of the judicial system, a lack of infrastructure, and the often (semi-)informal character of businesses in Latin America.
David Zannoni
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These alternatives are rather unattractive: the creditor will not like to remain with an unpaid or unsettled debt, and eventually, a write off, and the debtor might not like this situation either as it stands in the way of recovering the commercial relationship with creditor and it may harm debtor’s reputation in the business. And none of the parties will look forward to legal proceedings given the costs and time involved.
During the mediation process, the mediator will have joint sessions with creditor and debtor, and / or separate sessions with each of them, to understand the situation regarding the international debt or the dispute from each side’s point of view, and to learn about what each of the parties propose as solutions for the situation or the dispute. The sessions can with today’s technology, and depending on the size of the international debt, be organized in person or by teleconference.
The next stage is what is defined in mediation literature as “caucuses”: the mediator will start separate sessions and discussions with each of creditor and debtor to learn about their core interest, which elements of a settlement would be acceptable, and which are “no-go’s” or “deal breakers” for either creditor or debtor towards settlement of the international debt. The mediator will subsequently go back and forth between creditor and debtor with ideas, suggestions and proposals with the aim of finding a mutually acceptable settlement agreement. The mediator’s leverage here is that, although a settlement agreement will never 100% satisfy any of the parties, the alternatives – an unsettled international debt and loss of the commercial relationship and harm to a business reputation, or expensive and time consuming legal proceedings, are even less tempting.
Before you start negotiating, be sure you understand the circumstances of the debt. Why does debtor not pay? Is the creditor’s claim disputed or acknowledged? Does debtor have financial issues, short-term or long-term? Are financial issues business-related, sector-related or because of domestic economic, social, political or monetary problems (currently Brazil with an economy in regression, or several other Latin American countries like Colombia, Mexico and again Brazil who are dealing with heavy currency devaluations)? Can debtor not pay because they are subject to foreign currency controls (like Argentina or Venezuela)? Which alternatives do you possibly have if you do not accept to negotiate the international debt (insistence on full and immediate payment, legal proceedings to enforce payment, or a write off and end of commercial relationship)?
Equally as important as showing empathy for the debtor, is being straight in your communication with creditor. Never forget: you represent the creditor and your ultimate goal should be to gain as possible as possible from your negotiations during international debt recovery. From your negotiations, case by case, you will learn what the best possible achievement will be during the international debt recovery process. You should constantly communicate with creditor; explain to creditor the steps you are taking. What according to you is possible to achieve under the circumstances, and why. And which goals you set when you negotiate with debtor about the international debt.
Once you have reached a settlement, or you agreed with creditor and debtor on a payment plan, put the agreement on paper and make sure what the terms and conditions are, what is expected from debtor, and what debtor may expect from the creditor and from you if the agreement is honored and also when the agreement is not honored. It is important to give and take. Meaning that if debtor complies with the settlement payment or payment plan, he or she receives an official release letter and perhaps the door is open again for business between creditor and debtor. On the other hand, if debtor does not honor the agreement, it may mean that the full debt is claimed again by creditor, legal proceedings against debtor are started (if possible at all) or the commercial relationship between creditor and debtor is fully terminated.
If the international debt is between two businesses, both the creditor and the debtor may have an interest in maintaining the commercial relationship and solve any financial issues between them. This means that the debtor may be willing to pay and the creditor may be in a position to agree to a settlement of the debt, if necessary. We consider the existence of a commercial relationship and the importance of maintaining the commercial relationship as probably the most important leverage the side of the creditor may have during an international debt collection process.
Another important leverage the creditor may have is the alternative to start legal proceedings against debtor and to legally enforce payment of an outstanding debt. In reality though, often this alternative may be relative as legal alternatives for international debts are either limited, and / or time-consuming, and / or expensive. On the other hand, the fact that legal proceedings are time consuming and expensive also goes for the debtor, and this in itself may be sufficient leverage to push debtor to pay or except settlement.
Not unusually, creditor and debtor have been in business together a while and personal relationships have been established across departments and management. This may be another type of leverage the creditor may turn on when collecting a debt internationally. Depending on the size of businesses, there may be several people involved in the business relationship between creditor and debtor, and people may feel committed and may be willing to continue their personal relationships and avoid any personal issues as a result of the outstanding international debt. This leverage can also be used when attempting to collect an international debt, by involving in the negotiation people with a personal interest in the business relationship and personal relationships between them.
The importance of debtor’s industry reputation may also mean leverage for the creditor, when collecting an international debt. Debtor may feel that the existence of the international debt, and disruption of the commercial relationship because of the debt, if it becomes known within debtor’s industry, would damage debtor’s reputation. Some industries have warning lists for bad payers. The creditor, its legal representatives or its debt collection agency should definitely use this leverage, if present.
In first instance, it is of the utmost importance that you set the framework when you are collecting a debt internationally. Timelines, frequent and consistent following up by email and telephone, and if and when necessary, regular mail, means you set the rules of the game. You should almost show empathy, be professional, take into account the debtor’s situation and the circumstances that may affect speed and outcome, but at the end of the day your aim is to collect as much as possible, as fast as possible. Give debtor reasonable time between the follow ups to comply with what you request or agree, but make sure there are clear deadlines and strictly follow up on your own deadlines.
When communicating to collect a debt internationally, you must be aware of the leverage you have – or do not have. This determines whether you can demand full payment, should look for a settlement, can go legal or not, may consider accepting return of products or goods, and if there is a reasonable chance to reach an agreement on a payment plan. Leverage can be the existence of a commercial relationship the debtor still has an interest in to maintain or re-establish, the realistic option of enforcing payment legally if no payment is done or a payment agreement is reached amicably, or the reputation debtor wants to safeguard. Understanding the leverage, you have and using it in your communication is in our opinion is an absolutely essential tool for successful international debt recovery.
If the reason of an outstanding international debt is a dispute, international debt recovery turns into true mediation. If the situation requires so, and as often legal proceedings is a rather expensive, time-consuming and therefore unattractive alternative, in circumstances with a dispute involved, in reality the only serious option to recover part of the debt is mediation. Obviously the aim is to recover as much as possible, as fast as possible: as you will see, that should at all circumstances be the starting point. When you mediate between debtor and your client you will have to accept that the outcome will end up somewhere in the middle. You should always look for the best solution possible for your client, taking at the same time into account debtor’s (reasonable) arguments, situation, and circumstances.
Although in certain cases it is good to still send regular mail, at least if and when it might become necessary for file building in case of legal proceeding, for example, to formally have put an individual or business on notice, the letter has long lost its prominent function in international debt recovery. Often it is too slow, too unreliable and one of the less effective means of communication. Addresses are temporary, people and businesses move or even change country. We still mention it but it should not be on the top priority list.
Using the telephone to make calls is still in our view essential for effective and successful international debt recovery. Using the phone includes landlines, cell phones, WhatsApp, and Skype (the latter three also include chat options). Although one might close a deal by email only, usually understanding the context of debtor’ situation, negotiating payment or settlement, or mediation, can only be done effectively by talking to debtor.
International debt recovery nowadays is hard to imagine without e-mail. A lot of actual payment arrangements and settlements are fully negotiated only by using e-mail. Most of all however, e-mail is a speedy way of formal communication which has almost in its entirety replaced regular mail, to transmit notices, supporting documentation, payment proposals and payment plans. What makes e-mail often even more reliable than regular mail is that people tend to stick to their personal e-mail addresses, also when they change home or country. Physical addresses generally tend to be more temporary than e-mail. For international debt recovery, in our opinion, it is absolutely essential to make use of e-mail as a main element of communication.
Social Media have rapidly become very important means of communication in international debt recovery. Social Media like Facebook, Twitter, and Linked-In offer direct chat options. Also, like e-mail people tend to stick to their Social Media which makes it resistant with respect to moves or change of country. In addition, Social Media offer an important source of information about individual debtors or companies. Social Media should definitely be part of the means of communication in international debt recovery.