When to end out-of-court recovery: five signals that it is time to go to court

Out-of-court recovery follows a sound logic: a debtor who communicates often pays after a few reminders or agrees to instalments, the commercial relationship is not damaged and the creditor saves on court costs. Its weakness is that it easily drags on. Every fresh promise from the debtor looks like a reason to wait, and a year later the creditor learns that the claim is time-barred, the debtor has no assets or is in bankruptcy. The following five signals show when the out-of-court phase should end.

1. The end of the limitation period is approaching

Reminders, emails and telephone calls do not stop limitation. Only pursuing the right in court does:

The limitation period shall cease to run where the creditor, in order to satisfy or determine its right, takes any legal step which, under the rules governing court proceedings, is regarded as the commencement of proceedings or as the pursuit of a right in proceedings already commenced.

— Section 402 of Act No. 513/1991 Coll. (unofficial English translation)

Under the civil regime, the limitation period does not run where the creditor pursues the right in court and duly continues in the proceedings (Section 112 of the Civil Code). With a commercial obligation subject to a 4-year limitation period, the out-of-court phase must therefore not run into the final months of that period. If the debtor cooperates, there are two out-of-court safeguards: a written acknowledgement of the obligation, which starts a new limitation period, and, under the commercial regime, a written declaration by the debtor extending the limitation period (Section 401 of the Commercial Code). If the obligation is governed by Czech law, the limitation period does not run during negotiations where the parties have agreed on them, and it is also stopped by pursuing the right before a court where the creditor duly continues in the proceedings (Sections 647 and 648 of the Czech Civil Code). A comparison of these instruments is set out in our article on acknowledgement of debt under Slovak and Czech law.

2. The debtor has missed the instalment schedule

Where an instalment is missed, speed is decisive. If loss of the benefit of instalments was agreed, the creditor may demand the whole claim, but must exercise that right by the due date of the next following instalment at the latest (Section 565 of the Civil Code); the Czech Civil Code has the same rule (Section 1931). A creditor who keeps sending reminders until the next instalment falls due loses the right to accelerate the debt for that default. The decision on acceleration and on the further steps should therefore be taken immediately after the first missed instalment. How to draft the clause is described in our answer on acknowledgement of debt and an instalment schedule between businesses.

3. The debtor only makes promises and does not pay

Promises from a debtor that are not followed by payments do not advance recovery. If, after an agreed number of steps, the debtor has paid nothing and has not offered a written acknowledgement with instalments, further reminders merely postpone matters. Partial payments must be watched closely: under the commercial regime they may have the effects of acknowledging the remainder of the debt, but only where such an acknowledgement can be inferred from them. How such payments are appropriated is examined in our answer on what a partial payment is applied to.

4. The debtor is moving assets

A transfer of immovable property to a relative, the sale of a company for a nominal price or a new business with the same employees are signals that time is working against you. An enforcement title should then be obtained as soon as possible, and it should be assessed whether an action to set aside the transfers should be brought; its conditions are described in our answer on the debtor transferred assets to the family.

5. Enforcement proceedings, tax arrears or bankruptcy appear

If you find the debtor in the list of tax debtors, in the register of enforcement proceedings or in the insolvency register, a reminder is no longer the right instrument. Once bankruptcy is declared, the claim is pursued by registration, which has the same effects on limitation as pursuing it in court (Section 28(6) of Act No. 7/2005 Coll.). Payments that an insolvent debtor sends only to you may later be challenged by the trustee; we describe that risk in our article on the debtor paid and then went bankrupt.

With a portfolio, rules decide, not instinct

With dozens of debtors, each cannot be decided on individually. Escalation rules are therefore agreed in advance: after how many steps in the sequence a claim goes to a payment order, at what amount and remaining limitation period court proceedings are worthwhile, when a claim is merely monitored in the registers, and when a write-off or assignment is recommended. The rules are reflected in the reporting, so you can see which claims have moved into the court phase and why. The implications of a write-off are described in our answer on when an irrecoverable claim can be claimed as a tax expense.

What to have ready when the out-of-court phase ends

The move to court is quick if the out-of-court phase has left proper documentation: the contract or order, invoices with delivery notes or handover protocols, copies of reminders with the date of dispatch, a record of partial payments and what they were applied to, and written promises or an acknowledgement of debt. The application for a payment order and the calculation of default interest are built from these documents. If the supply was not covered by a written contract, see our answer on we delivered goods without a written contract.

How we can help

We run the reminder sequence, negotiations about instalments and the timely recommendation of the court route under our out-of-court debt recovery service. Escalation rules for an entire portfolio, batch filing of applications for payment orders in Slovakia and Czechia and regular reporting are set up within bulk debt recovery. When the time for court comes, with an undisputed invoice the quickest route is a payment order in Slovakia and, with a Czech debtor, a payment order in Czechia.