Ina Reese Tax & Legal Practice – Flensburg | Harrislee

Debt recovery by a solicitor or a debt collection agency

Law & Taxation Reese Flensburg
22.10.2026
General information
Lawyer’s fees, Lawyer’s fees – Contingency fees, debt recovery by a solicitor, Success fee, Objection to success-based fees, Sale of receivables, Debt collection, Debt collection agency, Debt collection costs, Costs: Success fee, Costs, success fee, appeal, Debt collection proceedings, Legal Services Act, Debtors to reimburse

Both debt collection agencies and solicitors’ firms are authorised to recover claims, and in principle they cost the debtor the same. The differences lie elsewhere: in the costs incurred by the creditor, in the representation provided following an objection, and in the tax treatment. We explain which approach is best suited to which type of claim.

Debt recovery by a solicitor or a debt collection agency

Debt recovery by a solicitor or a debt collection agency: which is best for your claim?

The invoice has been overdue for weeks, and the reminder has gone unanswered. Now, at the very latest, the question arises as to who will pursue the claim. The options are a debt collection agency and a law firm. Both claim to recover outstanding invoices quickly and cost-effectively for the creditor, and both are right – just not for every claim.

The costs that the debtor must reimburse are subject to the same upper limit in both cases, and the 2021 debt collection reform has further reduced this limit for undisputed claims. Anyone who bases their choice solely on price therefore overlooks the actual differences. We explain what debt collection agencies and law firms are permitted to do, who bears which costs, what happens if the debtor lodges an objection, and what tax issues arise in connection with debt collection and the sale of claims. The article concludes with practical guidance to aid decision-making.

Who is authorised to collect debts?

Debt collection agencies

Anyone who collects third-party claims as part of their own business must be registered in accordance with the Legal Services Act (Section 10(1), first sentence, No. 1 RDG). The requirements include, amongst other things, professional competence, personal integrity and professional indemnity insurance. Since 2021, debt collection services have explicitly included legal scrutiny and advice relating to the recovery of the debt (Section 2(2) of the Legal Services Act). A debt collection agency may therefore verify whether the claim is valid and advise the creditor on this matter, insofar as it relates to the recovery of the debt.

Supervision of debt collection agencies used to be the responsibility of the federal states, spread across more than 30 courts. Since 1 January 2025, this responsibility has been centralised at the Federal Office of Justice. You can check whether a company is registered in the public register of legal services.

Law firms

Solicitors are permitted to collect debts without the need for separate registration. They are subject to the supervision of their bar association and are also required to hold professional indemnity insurance. Unlike a debt collection agency, a law firm is not limited to debt recovery. It also advises on the underlying contract, any counter-claims by the debtor and legal proceedings, and represents the creditor in court.

The same obligations towards private individuals

Where debt collection agencies or solicitors pursue a claim against a private individual, the same disclosure requirements apply to both (Section 13a of the German Debt Collection Act (RDG), Section 43d of the German Solicitors’ Act (BRAO)). Even the first letter must specify, amongst other things, the client, the basis of the claim, a calculation of interest where interest is claimed, and the debt collection costs, including their type, amount and basis. Before agreeing to a deferral or instalment plan, the costs arising therefrom must be pointed out; before an acknowledgement of debt, the debtor must be informed of the defences and objections which they will generally forfeit as a result. These obligations do not apply to businesses.

What the debtor must repay

If the debtor is in default, they must reimburse the costs of legal proceedings as damages for default. This applies to debt collection agencies as well as to law firms. The fixed late payment charge of 40 euros, which the creditor may claim from debtors who are not consumers, is set off against these costs (Section 288(5) of the German Civil Code (BGB)).

The amount is subject to the same limit for both methods. Debt collection costs are recoverable only up to the amount that a solicitor could charge for the same work under the Solicitors’ Fees Act (Section 13e RDG). Since October 2021, lower rates have applied to undisputed claims. A business fee of more than 0.9 is then only permissible in particularly extensive or difficult cases. In straightforward cases, for example where the debtor pays in response to the first demand for payment, the fee is capped at 0.5 (No. 2300 VV RVG). If an instalment payment agreement is reached, a reduced settlement fee of 0.7 may also apply, calculated on the basis of half the claim (Section 31b of the RVG).

It follows that: for out-of-court proceedings, the debtor must reimburse the debt collection agency no more than they would have to pay a solicitor’s practice. If both act in succession, the debtor is generally not required to bear double the costs. Reimbursement is limited to the costs that would have been incurred had the solicitor been engaged alone (Section 13f of the German Debt Collection Act (RDG)). This does not apply if the debtor only disputes the claim after the debt collection agency has been engaged, and the creditor therefore instructs a solicitor.

What the creditor bears themselves

The differences only become apparent when there is nothing to be recovered from the debtor. In that case, the costs are borne by the creditor, unless otherwise agreed.

At the debt collection agency Performance-based models are common: the creditor pays only a commission on amounts recovered; in the event of failure, they pay nothing or a flat fee. Some providers operate on the basis of membership fees or flat-rate fees per case. How much the creditor actually receives in the end is set out in the contract, not in the advertising leaflet. It is worth paying close attention to commissions, expenses and the offsetting of payments made by the debtor in the contract.

At the law firm As a general rule, remuneration is governed by the Lawyers„ Fees Act. Since October 2021, lawyers have also been permitted to agree on a success fee for debt collection activities (Section 4a(1) of the Lawyers“ Fees Act). This applies to claims up to 2,000 euros and, regardless of the amount, to out-of-court debt recovery, court-ordered payment proceedings and the enforcement of claims against movable assets. Contingency fees are excluded for claims that are exempt from attachment. The ‘success-only’ argument is therefore no longer a unique selling point of debt collection agencies.

Sale of receivables: Some debt collection agencies also buy debts. The creditor receives money immediately and is relieved of the risk of default, but sells the debt at a price well below its face value. In the case of debts where payment is in arrears, the discount is often substantial. We explain below what this means in terms of VAT.

The key difference: the contradiction

Debt collection agencies are not limited to representing creditors out of court. They may also apply for a payment order, conduct the payment order proceedings up to the point of referral to the court of first instance, and enforce monetary claims against the debtor’s movable assets, for example by attaching bank accounts or seizing property (Section 79(2), second sentence, No. 4 of the Code of Civil Procedure (ZPO)). Excluded from this are all actions that initiate contentious proceedings or are to be carried out in the course of such proceedings.

If the debtor lodges an objection to the order for payment, the debt collection agency may neither apply for proceedings on the merits nor represent the creditor in such proceedings. An example: A joinery firm from Flensburg has supplied a fitted kitchen; the invoice for 6,800 euros remains outstanding. The debt collection agency applies for a payment order; the customer objects, citing defects in the cabinet fronts. For the contentious proceedings before the magistrates’ court, the business must now either represent itself or instruct a law firm. The law firm must familiarise itself with the case, review the contract, the handover and the complaints regarding defects, and substantiate the claim. By that point, several weeks have often passed.

For claims where objections are foreseeable, the direct route to the solicitors’ office is therefore usually the quicker option. If the customer has already raised a complaint about defects or contested the invoice prior to the debt collection proceedings, an objection is almost certain. In such cases, it may even make more sense to bring an immediate legal action rather than apply for a debt order. We explain when a payment order is nevertheless important – for example, to suspend the limitation period at the end of the year – in our article on Limitation period at the end of the year.

When it might be worth using a debt collection agency

Debt collection agencies are geared towards high-volume business. Their strengths lie in processing large numbers of similar claims according to a fixed procedure:

Many small, undisputed claims, such as subscriptions, memberships or online shopping, where there are rarely any disputes about the service provided.
Automated processes: Interfaces with accounting systems, address verification and creditworthiness data enable large volumes of cases to be processed efficiently.
Long-term monitoring of secured claims: In the case of debtors who currently have no assets, some creditors monitor them over a period of years to see whether their financial situation improves.
Debt purchase, if immediate liquidity is more important than receiving the full amount.

Before engaging a debt collection agency, you should check its entry in the Register of Legal Services and read the contract carefully. When dealing with private individuals, a debt collection agency must state the name of its supervisory authority and provide a breakdown of its costs. If this information is missing from the standard letters, you should exercise caution.

When the journey to the law firm is shorter

A law firm is generally the better choice when it comes to individual claims where the case requires more than a standard procedure:

Objections are to be expected, for example, due to alleged defects, a set-off against counter-claims or a dispute regarding the scope of services.
Larger sums in business transactions, where it is worth carrying out a thorough review of the contract, the terms and conditions, and safeguards such as retention of title.
The business relationship is to continue. A personalised letter from a solicitor – possibly including a settlement proposal – is often received differently by business clients than a standardised debt collection letter.
The limitation period is about to expire. A decision must then be made quickly as to whether a payment order or legal action is the right course of action.
Legal and tax issues are interlinked, for example, in the case of a VAT adjustment or a write-down in the annual accounts.

The main advantage is that a law firm can handle the case from the initial demand for payment right through to the judgement and enforcement, without any change of lawyer and without the need for the lawyer to familiarise themselves with the case twice.

Tax considerations

VAT on debt collection and legal fees

Debt collection agencies and law firms generally invoice their fees inclusive of VAT. Whether the debtor is required to reimburse this VAT depends on the creditor. If the creditor is entitled to deduct input VAT, the VAT does not represent an economic burden on them. They may therefore only demand the net costs from the debtor. Anyone who nevertheless includes VAT in a claim against a private individual must expressly state that the client cannot deduct it as input VAT. This applies equally to debt collection agencies and solicitors (Section 13a(1)(6) of the German Regulation of Legal Services Act (RDG), Section 43d(1)(6) of the German Solicitors’ Act (BRAO)). Small business owners and other creditors who are not entitled to deduct input VAT may claim the gross costs.

Costs and reimbursements in the calculation of profit

Debt collection commissions, solicitors’ fees and court costs relating to trade receivables are business expenses. If the debtor subsequently reimburses these costs, the reimbursements constitute business income. This applies regardless of whether a debt collection agency or a law firm was involved.

Sale of receivables: VAT is not based on the purchase price

Anyone who sells a debt to a debt collection agency for less than its face value cannot simply adjust the VAT on the basis of the purchase price. In the view of the tax authorities, the consideration in this case is determined by what the customer actually pays, not by the proceeds from the sale (Section 17.1(6) of the VAT Implementation Regulations). The seller may only reduce their VAT to the extent that they can prove the debt is uncollectible. To do so, they must know what the buyer has recovered from the debtor. A debt purchase agreement should therefore oblige the buyer to disclose the amounts recovered.

The receivable sold is derecognised in the balance sheet. The loss arising from the sale reduces the profit, although the VAT portion must be treated separately in accordance with the rules described above. Under the cash-basis accounting method, the purchase price constitutes operating income, as the receivable had not previously been recognised as income.

Receivables currently being recovered

As long as a claim is being handled by a debt collection agency or a law firm, it remains on the creditor’s books. Whether it requires a write-down as at the balance sheet date, and when VAT may be adjusted on the grounds of irrecoverability, depends on the stage of the proceedings. A documented record of the process, from the dunning procedure through to enforcement, helps to justify this to the tax office. Further details can be found in our guide Debt management for small businesses.

Decision-making guide: Debt collection agency or law firm?

Criterion	More like a debt collection agency	More of a law firm
Type of claims	Many small claims of a similar nature	Individual claims, larger sums
debtor	Retail customers in the mass market	Business customers, regular customers
Risk of dispute	Claim undisputed, payment uncontested	Defects, set-off or objections foreseeable
Procedure	Out-of-court proceedings, debt collection proceedings, enforcement against movable assets	Additional claim and contentious proceedings
Business relationship	It doesn’t really matter	To be retained
Liquidity	Request to purchase receivables	The full amount is to be recovered
Supplementary questions	None	Contract, terms and conditions, security, tax

Often, the answer is not a case of ‘either/or’. A company can hand over its small-scale claims against private customers to a debt collection agency and refer disputed or larger cases directly to the law firm. It is important to make this decision at an early stage so that the same claim does not go through two different bodies.

Legal and tax services under one roof

Civil law determines whether a claim is enforceable. Tax law determines what constitutes a default, a sale or a refund of VAT and profit. In many businesses, different advisers are responsible for these matters.

Ina Reese is a solicitor, a specialist in tax law and a tax adviser. In our Credit management We handle the enforcement process from the lawyer’s demand for payment, through the dunning procedure, right through to enforcement proceedings, and we also represent you in contentious proceedings. We clarify the tax implications of bad debts and the sale of receivables in our Tax advice. We explain why this connection saves time and reduces the need for coordination in everyday life in the article Tax and legal advice from a single source.

Frequently asked questions about debt collection

Is debt recovery through a solicitor more expensive than using a debt collection agency?

Not for the debtor. The recoverable debt collection costs are limited to the solicitor’s fees, so both approaches result in the same maximum amounts. For the creditor, it depends on the agreement. Debt collection agencies often work on a success-based fee basis; since 2021, law firms have also been permitted to agree on a success fee for debt collection activities.

Is a debt collection agency allowed to apply for a payment order?

Yes. Debt collection agencies are permitted to conduct the court-based dunning procedure up to the stage of referral to the court hearing the dispute, and to enforce the enforcement order against the debtor’s movable assets. They are not permitted to bring legal proceedings or to represent the creditor in contentious proceedings.

Can I still instruct a solicitor after the debt collection agency has been involved?

Yes, at any time. However, the debtor is not, in principle, required to reimburse the additional costs incurred as a result of the change. They are only liable for the costs that would have been incurred had the solicitor been instructed directly. The situation is different if the debtor only disputed the claim after the debt collection agency had been instructed.

How can I tell if a debt collection agency is reputable?

An entry in the Register of Legal Services, a comprehensible contract setting out clear details of fees and expenses, and correspondence containing the statutory mandatory information. This includes, in dealings with private individuals, the name of the competent supervisory authority, which has been the Federal Office of Justice since 2025.

In summary

Debt collection agencies must be registered under the RDG and, since 2025, have been subject to supervision by the Federal Office of Justice. Lawyers are permitted to collect debts without being registered.
Debt collection costs are only recoverable up to the amount of the solicitor’s fees. For the debtor, therefore, the debt collection agency is no more expensive than the law firm. Costs incurred twice as a result of a change of agency are, in principle, not recoverable.
Both offer success-based fees. Since 2021, law firms have been permitted to agree such fees for debt recovery services.
Once an objection has been lodged against the order for payment, the debt collection agency is not permitted to represent the creditor in the subsequent proceedings. Where objections are foreseeable, it is therefore usually quicker to go through a solicitor’s firm.
Debt collection agencies really come into their own when dealing with large numbers of small, uncontested claims and when purchasing debts.
Creditors entitled to deduct input VAT receive only the net costs from the debtor. When a debt is sold, the VAT adjustment is based on the amount actually recovered, not on the purchase price.

Would you like to know which approach is best for your outstanding debt? During an initial consultation lasting around 15 minutes, we’ll assess where you’re at and what steps would be best to take. Get in touch now