To collect overdue payments owed in connection with a commercial transaction in Latin America, it is important to follow a step-by-step approach. Below are the stages of debt collection the foreign creditor should take into consideration.
Amicable debt collection for commercial transactions
The first step is to attempt to collect the debt amicably, generally on a contingency basis. This means that the foreign creditor will contract a debt collection agency. The creditor does not run any financial risk, as the agency will only charge commission in case of success. For the debtor, the involvement of a debt collector may imply to push needed towards a solution, which is full payment or a payment plan. Usually, a debt collection agency takes a couple of months to attempt to obtain an amicable solution for the overdue payment on the commercial transaction.
Mediation in case of disputes
If amicable collections do not achieve payment or otherwise lead to a settlement, a pre-legal option could be mediation. If there is contact with the debtor but debtor does not pay the overdue amount, either because there is a dispute with respect to the quality of products or services delivered by the creditor in connection with the commercial transaction, there might be an interest on both sides to mediate and look for an alternative settlement. This may especially be the case if both parties have a continuous commercial relationship which they desire to maintain.
Claim assessment for the foreign creditor
In case amicable debt collection and if applicable, mediation do not result in payment, a payment plan or otherwise a settlement agreement between creditor and debtor, it is important to assess the claim for potential legal steps. At this stage, the presence and quality of a contract, order forms, confirmations, correspondence between the parties, and invoices regarding the commercial transaction is vital to determine legal potential.
Credit registration in Latin America
As a step in between pre-legal and legal, and to put pressure on the debtor, in some countries in Latin America it is possible to formally register the foreign debt at a public, semi-public or private watch dog. This can be a trigger for the debtor to pay or to come (or return) to the negotiation table.
Legal proceedings to enforce payment
Should credit registration not work either, or not be a possibility, and should the claim be solid enough to enforce payment of the overdue amount legally, then the final alternative to collect a debt on behalf of a foreign creditor is to start legal proceedings against the debtor. Legal proceedings should be started in the country of residence of the debtor. In addition to an assessment whether the claim is solid, creditor must also look if it is worth proceeding from a cost-perspective.
The stages a foreign creditor should follow to collect an overdue payment on a commercial transaction in Latin America are: amicable debt collection, mediation, claim assessment, credit registration, and legal proceedings.
David Zannoni
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The next step is to understand the legal context. How do contracts and other documents, like order forms, certificates and licenses work? Which are the requirements to make sure that these documents, which may be entered into between companies from different countries, have legal value in the country your client is based in? The assessment hereof may vary substantially per country in Latin America.
For an effective account receivables management in Latin America, you should understand local payment processes. Such payment processes may vary per country or region, and each company may have their own specifics. Generally speaking, payment processes may be subject to tax requirements, foreign currency exchange issues, short term or long-term economic circumstances, and administrative requirements imposed by law.
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.
