Since early 2021, the UK has seen an increase in the cost of living and in April 2022 inflation reached its highest recorded level. The significant escalation on the cost of living has been wide reaching, it has affected affordability of food, clothes, mortgages, fuel, and most notably energy bills. Energy bills for the average household are likely to increase by at least £690 per year.

This increase and inflation could adversely impact debt recovery for business, against both individuals and companies. However, taking proactive steps to tackle bad debt (as a creditor) and to resolve unpaid debt issues (as a debtor) can facilitate a swift resolution.

The current economic factors are likely to significantly affect mounting debt and the creditors’ ability to recover debt.

Debtor: Current trends suggests that as a direct consequence of the rise in cost of living, an increasing number of people are using credit to cover essential monthly purchases. The increase in the cost of living is placing more pressure on debtors due to their growing domestic and business expenditures and as such, some debtors are using credit to manage amplified levels of debt.

However, it is important for a debtor to appreciate that with litigation comes increased costs. The longer the debtor does not repay the monies owed while litigation is ongoing, the more debt will be incurred through court costs, legal costs and interest. This will add more pressure unless a sustainable solution is found.

When tackling debt problems, debtors should not ignore demands as failure to engage and tackle debt head on is likely to intensify the debt owed and increase the extent of their liability. Instead, we advise debtors to consider attempting negotiation for reasonable monthly payments as soon as possible in order to help manage their financial position. Agreeing monthly instalments may be an attractive solution as it will help prevent the debt from growing and will allow debtors to manage their cashflow. Agreeing a payment plan promptly will likely incentivise creditors to be more flexible in their approach to recovery, which in turn helps to prevent costs escalating.

Creditor: As highlighted above, with the cost of living on the rise, there are less funds to go round and as such collecting payment from some debtors will be more difficult. Courts may be unwilling to force debtors into payment plans if no funds are available and existing arrangements could fall into arrears. The prospect of recovery against some debtors will reduce.

Creditors should be mindful of their cash flow and the behaviour of the debtors. To reduce their bad debt exposure, it is imperative that creditors act quickly to make a recovery. It is also important that creditors consider other options such as negotiating a payment plan with the debtor as soon as possible. The longer creditors wait to recover a debt, the less likely the chances of a successful recovery.

Final point: We believe that creditors and debtors engaging in a positive dialogue often helps to find a workable resolution for both. Taking action to resolve disputes as quickly as possible helps to establish whether there is scope to recover, and if so, whether instalment plans or voluntary security are viable alternatives. In some circumstances, this approach will also help to preserve future relationships.