Debt reco\u00advery by a soli\u00adci\u00adtor or a debt coll\u00adec\u00adtion agen\u00adcy: which is best for your claim?<\/p>\n\n\n\n
The invoice has been over\u00addue for weeks, and the remin\u00adder has gone unans\u00adwe\u00adred. Now, at the very latest, the ques\u00adti\u00adon ari\u00adses as to who will pur\u00adsue the cla\u00adim. The opti\u00adons are a debt coll\u00adec\u00adtion agen\u00adcy and a law firm. Both cla\u00adim to reco\u00adver out\u00adstan\u00adding invoices quick\u00adly and cost-effec\u00adtively for the cre\u00addi\u00adtor, and both are right \u2013 just not for every claim.<\/p>\n\n\n\n
The cos\u00adts that the deb\u00adtor must reim\u00adbur\u00adse are sub\u00adject to the same upper limit in both cases, and the 2021 debt coll\u00adec\u00adtion reform has fur\u00adther redu\u00adced this limit for undis\u00adpu\u00adted claims. Anyo\u00adne who bases their choice sole\u00adly on pri\u00adce the\u00adr\u00ade\u00adfo\u00adre over\u00adlooks the actu\u00adal dif\u00adfe\u00adren\u00adces. We explain what debt coll\u00adec\u00adtion agen\u00adci\u00ades and law firms are per\u00admit\u00adted to do, who bears which cos\u00adts, what hap\u00adpens if the deb\u00adtor lodges an objec\u00adtion, and what tax issues ari\u00adse in con\u00adnec\u00adtion with debt coll\u00adec\u00adtion and the sale of claims. The artic\u00adle con\u00adcludes with prac\u00adti\u00adcal gui\u00addance to aid decision-making.<\/p>\n\n\n\n
Anyo\u00adne who coll\u00adects third-par\u00adty claims as part of their own busi\u00adness must be regis\u00adtered in accordance with the Legal Ser\u00advices Act (Sec\u00adtion 10(1), first sen\u00adtence, No. 1 RDG). The requi\u00adre\u00adments include, among\u00adst other things, pro\u00adfes\u00adsio\u00adnal com\u00adpe\u00adtence, per\u00adso\u00adnal inte\u00adgri\u00adty and pro\u00adfes\u00adsio\u00adnal indem\u00adni\u00adty insu\u00adrance. Sin\u00adce 2021, debt coll\u00adec\u00adtion ser\u00advices have expli\u00adcit\u00adly included legal scru\u00adti\u00adny and advice rela\u00adting to the reco\u00advery of the debt (Sec\u00adtion 2(2) of the Legal Ser\u00advices Act). A debt coll\u00adec\u00adtion agen\u00adcy may the\u00adr\u00ade\u00adfo\u00adre veri\u00adfy whe\u00adther the cla\u00adim is valid and advi\u00adse the cre\u00addi\u00adtor on this mat\u00adter, inso\u00adfar as it rela\u00adtes to the reco\u00advery of the debt.<\/p>\n\n\n\n
Super\u00advi\u00adsi\u00adon of debt coll\u00adec\u00adtion agen\u00adci\u00ades used to be the respon\u00adsi\u00adbi\u00adli\u00adty of the fede\u00adral sta\u00adtes, spread across more than 30 courts. Sin\u00adce 1 Janu\u00adary 2025, this respon\u00adsi\u00adbi\u00adli\u00adty has been cen\u00adtra\u00adli\u00adsed at the Fede\u00adral Office of Jus\u00adti\u00adce. You can check whe\u00adther a com\u00adpa\u00adny is regis\u00adtered in the public regis\u00adter of legal services.<\/p>\n\n\n\n
Soli\u00adci\u00adtors are per\u00admit\u00adted to coll\u00adect debts wit\u00adhout the need for sepa\u00adra\u00adte regis\u00adtra\u00adti\u00adon. They are sub\u00adject to the super\u00advi\u00adsi\u00adon of their bar asso\u00adcia\u00adti\u00adon and are also requi\u00adred to hold pro\u00adfes\u00adsio\u00adnal indem\u00adni\u00adty insu\u00adrance. Unli\u00adke a debt coll\u00adec\u00adtion agen\u00adcy, a law firm is not limi\u00adt\u00aded to debt reco\u00advery. It also advi\u00adses on the under\u00adly\u00ading con\u00adtract, any coun\u00adter-claims by the deb\u00adtor and legal pro\u00adcee\u00addings, and repres\u00adents the cre\u00addi\u00adtor in court.<\/p>\n\n\n\n
Whe\u00adre debt coll\u00adec\u00adtion agen\u00adci\u00ades or soli\u00adci\u00adtors pur\u00adsue a cla\u00adim against a pri\u00adva\u00adte indi\u00advi\u00addu\u00adal, the same dis\u00adclo\u00adsure requi\u00adre\u00adments app\u00adly to both (Sec\u00adtion 13a of the Ger\u00adman Debt Coll\u00adec\u00adtion Act (RDG), Sec\u00adtion 43d of the Ger\u00adman Soli\u00adci\u00adtors\u2019 Act (BRAO)). Even the first let\u00adter must spe\u00adci\u00adfy, among\u00adst other things, the cli\u00adent, the basis of the cla\u00adim, a cal\u00adcu\u00adla\u00adti\u00adon of inte\u00adrest whe\u00adre inte\u00adrest is clai\u00admed, and the debt coll\u00adec\u00adtion cos\u00adts, inclu\u00adding their type, amount and basis. Befo\u00adre agre\u00ade\u00ading to a defer\u00adral or inst\u00adal\u00adment plan, the cos\u00adts ari\u00adsing the\u00adr\u00ade\u00adf\u00adrom must be poin\u00adted out; befo\u00adre an ack\u00adnow\u00adled\u00adge\u00adment of debt, the deb\u00adtor must be infor\u00admed of the defen\u00adces and objec\u00adtions which they will gene\u00adral\u00adly for\u00adfeit as a result. The\u00adse obli\u00adga\u00adti\u00adons do not app\u00adly to businesses.<\/p>\n\n\n\n
If the deb\u00adtor is in default, they must reim\u00adbur\u00adse the cos\u00adts of legal pro\u00adcee\u00addings as dama\u00adges for default. This appli\u00ades to debt coll\u00adec\u00adtion agen\u00adci\u00ades as well as to law firms. The fixed late pay\u00adment char\u00adge of 40 euros, which the cre\u00addi\u00adtor may cla\u00adim from deb\u00adtors who are not con\u00adsu\u00admers, is set off against the\u00adse cos\u00adts (Sec\u00adtion 288(5) of the Ger\u00adman Civil Code (BGB)).<\/p>\n\n\n\n
The amount is sub\u00adject to the same limit for both methods. Debt coll\u00adec\u00adtion cos\u00adts are reco\u00advera\u00adble only up to the amount that a soli\u00adci\u00adtor could char\u00adge for the same work under the Soli\u00adci\u00adtors\u2019 Fees Act (Sec\u00adtion 13e RDG). Sin\u00adce Octo\u00adber 2021, lower rates have appli\u00aded to undis\u00adpu\u00adted claims. A busi\u00adness fee of more than 0.9 is then only per\u00admis\u00adsi\u00adble in par\u00adti\u00adcu\u00adlar\u00adly exten\u00adsi\u00adve or dif\u00adfi\u00adcult cases. In straight\u00adfor\u00adward cases, for exam\u00adp\u00adle whe\u00adre the deb\u00adtor pays in respon\u00adse to the first demand for pay\u00adment, the fee is cap\u00adped at 0.5 (No. 2300 VV RVG). If an inst\u00adal\u00adment pay\u00adment agree\u00adment is rea\u00adched, a redu\u00adced sett\u00adle\u00adment fee of 0.7 may also app\u00adly, cal\u00adcu\u00adla\u00adted on the basis of half the cla\u00adim (Sec\u00adtion 31b of the RVG).<\/p>\n\n\n\n
It fol\u00adlows that: for out-of-court pro\u00adcee\u00addings, the deb\u00adtor must reim\u00adbur\u00adse the debt coll\u00adec\u00adtion agen\u00adcy no more than they would have to pay a solicitor\u2019s prac\u00adti\u00adce. If both act in suc\u00adces\u00adsi\u00adon, the deb\u00adtor is gene\u00adral\u00adly not requi\u00adred to bear dou\u00adble the cos\u00adts. Reim\u00adbur\u00adse\u00adment is limi\u00adt\u00aded to the cos\u00adts that would have been incur\u00adred had the soli\u00adci\u00adtor been enga\u00adged alo\u00adne (Sec\u00adtion 13f of the Ger\u00adman Debt Coll\u00adec\u00adtion Act (RDG)). This does not app\u00adly if the deb\u00adtor only dis\u00adpu\u00adtes the cla\u00adim after the debt coll\u00adec\u00adtion agen\u00adcy has been enga\u00adged, and the cre\u00addi\u00adtor the\u00adr\u00ade\u00adfo\u00adre ins\u00adtructs a solicitor.<\/p>\n\n\n\n
The dif\u00adfe\u00adren\u00adces only beco\u00adme appa\u00adrent when the\u00adre is not\u00adhing to be reco\u00adver\u00aded from the deb\u00adtor. In that case, the cos\u00adts are bor\u00adne by the cre\u00addi\u00adtor, unless other\u00adwi\u00adse agreed.<\/p>\n\n\n\n
At the debt coll\u00adec\u00adtion agen\u00adcy<\/strong> Per\u00adfor\u00admance-based models are com\u00admon: the cre\u00addi\u00adtor pays only a com\u00admis\u00adsi\u00adon on amounts reco\u00adver\u00aded; in the event of fail\u00adure, they pay not\u00adhing or a flat fee. Some pro\u00advi\u00adders ope\u00adra\u00adte on the basis of mem\u00adber\u00adship fees or flat-rate fees per case. How much the cre\u00addi\u00adtor actual\u00adly recei\u00adves in the end is set out in the con\u00adtract, not in the adver\u00adti\u00adsing leaf\u00adlet. It is worth pay\u00ading clo\u00adse atten\u00adti\u00adon to com\u00admis\u00adsi\u00adons, expen\u00adses and the off\u00adset\u00adting of pay\u00adments made by the deb\u00adtor in the contract.<\/p>\n\n\n\n At the law firm<\/strong> As a gene\u00adral rule, remu\u00adne\u00adra\u00adti\u00adon is gover\u00adned by the Lawy\u00aders\u201e Fees Act. Sin\u00adce Octo\u00adber 2021, lawy\u00aders have also been per\u00admit\u00adted to agree on a suc\u00adcess fee for debt coll\u00adec\u00adtion acti\u00advi\u00adties (Sec\u00adtion 4a(1) of the Lawy\u00aders\u201c Fees Act). This appli\u00ades to claims up to 2,000 euros and, regard\u00adless of the amount, to out-of-court debt reco\u00advery, court-orde\u00adred pay\u00adment pro\u00adcee\u00addings and the enforce\u00adment of claims against mova\u00adble assets. Con\u00adtin\u00adgen\u00adcy fees are excluded for claims that are exempt from attach\u00adment. The \u2018suc\u00adcess-only\u2019 argu\u00adment is the\u00adr\u00ade\u00adfo\u00adre no lon\u00adger a uni\u00adque sel\u00adling point of debt coll\u00adec\u00adtion agencies.<\/p>\n\n\n\n Sale of receiv\u00ada\u00adbles:<\/strong> Some debt coll\u00adec\u00adtion agen\u00adci\u00ades also buy debts. The cre\u00addi\u00adtor recei\u00adves money imme\u00addia\u00adte\u00adly and is reli\u00ade\u00adved of the risk of default, but sells the debt at a pri\u00adce well below its face value. In the case of debts whe\u00adre pay\u00adment is in arre\u00adars, the dis\u00adcount is often sub\u00adstan\u00adti\u00adal. We explain below what this means in terms of VAT.<\/p>\n\n\n\n Debt coll\u00adec\u00adtion agen\u00adci\u00ades are not limi\u00adt\u00aded to repre\u00adsen\u00adting cre\u00addi\u00adtors out of court. They may also app\u00adly for a pay\u00adment order, con\u00adduct the pay\u00adment order pro\u00adcee\u00addings up to the point of refer\u00adral to the court of first ins\u00adtance, and enforce mone\u00adta\u00adry claims against the debtor\u2019s mova\u00adble assets, for exam\u00adp\u00adle by atta\u00adching bank accounts or sei\u00adzing pro\u00adper\u00adty (Sec\u00adtion 79(2), second sen\u00adtence, No. 4 of the Code of Civil Pro\u00adce\u00addu\u00adre (ZPO)). Excluded from this are all actions that initia\u00adte con\u00adten\u00adtious pro\u00adcee\u00addings or are to be car\u00adri\u00aded out in the cour\u00adse of such proceedings.<\/p>\n\n\n\n If the deb\u00adtor lodges an objec\u00adtion to the order for pay\u00adment, the debt coll\u00adec\u00adtion agen\u00adcy may neither app\u00adly for pro\u00adcee\u00addings on the merits nor repre\u00adsent the cre\u00addi\u00adtor in such pro\u00adcee\u00addings. An exam\u00adp\u00adle: A joi\u00adn\u00adery firm from Flens\u00adburg has sup\u00adpli\u00aded a fit\u00adted kit\u00adchen; the invoice for 6,800 euros remains out\u00adstan\u00adding. The debt coll\u00adec\u00adtion agen\u00adcy appli\u00ades for a pay\u00adment order; the cus\u00adto\u00admer objects, citing defects in the cabi\u00adnet fronts. For the con\u00adten\u00adtious pro\u00adcee\u00addings befo\u00adre the magis\u00adtra\u00adtes\u2019 court, the busi\u00adness must now eit\u00adher repre\u00adsent its\u00adelf or ins\u00adtruct a law firm. The law firm must fami\u00adlia\u00adri\u00adse its\u00adelf with the case, review the con\u00adtract, the han\u00addo\u00adver and the com\u00adplaints regar\u00adding defects, and sub\u00adstan\u00adtia\u00adte the cla\u00adim. By that point, seve\u00adral weeks have often passed.<\/p>\n\n\n\n For claims whe\u00adre objec\u00adtions are fore\u00adseeable, the direct rou\u00adte to the soli\u00adci\u00adtors\u2019 office is the\u00adr\u00ade\u00adfo\u00adre usual\u00adly the quicker opti\u00adon. If the cus\u00adto\u00admer has alre\u00ada\u00addy rai\u00adsed a com\u00adplaint about defects or con\u00adtes\u00adted the invoice pri\u00ador to the debt coll\u00adec\u00adtion pro\u00adcee\u00addings, an objec\u00adtion is almost cer\u00adtain. In such cases, it may even make more sen\u00adse to bring an imme\u00addia\u00adte legal action rather than app\u00adly for a debt order. We explain when a pay\u00adment order is nevert\u00adhel\u00adess important \u2013 for exam\u00adp\u00adle, to sus\u00adpend the limi\u00adta\u00adti\u00adon peri\u00adod at the end of the year \u2013 in our artic\u00adle on Limi\u00adta\u00adti\u00adon peri\u00adod at the end of the year<\/a>.<\/p>\n\n\n\n Debt coll\u00adec\u00adtion agen\u00adci\u00ades are geared towards high-volu\u00adme busi\u00adness. Their strengths lie in pro\u00adces\u00adsing lar\u00adge num\u00adbers of simi\u00adlar claims accor\u00adding to a fixed procedure:<\/p>\n\n\n\n Befo\u00adre enga\u00adging a debt coll\u00adec\u00adtion agen\u00adcy, you should check its ent\u00adry in the Regis\u00adter of Legal Ser\u00advices and read the con\u00adtract careful\u00adly. When deal\u00ading with pri\u00adva\u00adte indi\u00advi\u00addu\u00adals, a debt coll\u00adec\u00adtion agen\u00adcy must sta\u00adte the name of its super\u00advi\u00adso\u00adry aut\u00adho\u00adri\u00adty and pro\u00advi\u00adde a break\u00addown of its cos\u00adts. If this infor\u00adma\u00adti\u00adon is miss\u00ading from the stan\u00addard let\u00adters, you should exer\u00adcise caution.<\/p>\n\n\n\n A law firm is gene\u00adral\u00adly the bet\u00adter choice when it comes to indi\u00advi\u00addu\u00adal claims whe\u00adre the case requi\u00adres more than a stan\u00addard procedure:<\/p>\n\n\n\n The main advan\u00adta\u00adge is that a law firm can hand\u00adle the case from the initi\u00adal demand for pay\u00adment right through to the jud\u00adge\u00adment and enforce\u00adment, wit\u00adhout any chan\u00adge of lawy\u00ader and wit\u00adhout the need for the lawy\u00ader to fami\u00adlia\u00adri\u00adse them\u00adsel\u00adves with the case twice.<\/p>\n\n\n\n Debt coll\u00adec\u00adtion agen\u00adci\u00ades and law firms gene\u00adral\u00adly invoice their fees inclu\u00adsi\u00adve of VAT. Whe\u00adther the deb\u00adtor is requi\u00adred to reim\u00adbur\u00adse this VAT depends on the cre\u00addi\u00adtor. If the cre\u00addi\u00adtor is entit\u00adled to deduct input VAT, the VAT does not repre\u00adsent an eco\u00adno\u00admic bur\u00adden on them. They may the\u00adr\u00ade\u00adfo\u00adre only demand the net cos\u00adts from the deb\u00adtor. Anyo\u00adne who nevert\u00adhel\u00adess includes VAT in a cla\u00adim against a pri\u00adva\u00adte indi\u00advi\u00addu\u00adal must express\u00adly sta\u00adte that the cli\u00adent can\u00adnot deduct it as input VAT. This appli\u00ades equal\u00adly to debt coll\u00adec\u00adtion agen\u00adci\u00ades and soli\u00adci\u00adtors (Sec\u00adtion 13a(1)(6) of the Ger\u00adman Regu\u00adla\u00adti\u00adon of Legal Ser\u00advices Act (RDG), Sec\u00adtion 43d(1)(6) of the Ger\u00adman Soli\u00adci\u00adtors\u2019 Act (BRAO)). Small busi\u00adness owners and other cre\u00addi\u00adtors who are not entit\u00adled to deduct input VAT may cla\u00adim the gross costs.<\/p>\n\n\n\n Debt coll\u00adec\u00adtion com\u00admis\u00adsi\u00adons, soli\u00adci\u00adtors\u2019 fees and court cos\u00adts rela\u00adting to trade receiv\u00ada\u00adbles are busi\u00adness expen\u00adses. If the deb\u00adtor sub\u00adse\u00adquent\u00adly reim\u00adbur\u00adses the\u00adse cos\u00adts, the reim\u00adbur\u00adse\u00adments con\u00adsti\u00adtu\u00adte busi\u00adness inco\u00adme. This appli\u00ades regard\u00adless of whe\u00adther a debt coll\u00adec\u00adtion agen\u00adcy or a law firm was involved.<\/p>\n\n\n\n Anyo\u00adne who sells a debt to a debt coll\u00adec\u00adtion agen\u00adcy for less than its face value can\u00adnot sim\u00adply adjust the VAT on the basis of the purcha\u00adse pri\u00adce. In the view of the tax aut\u00adho\u00adri\u00adties, the con\u00adside\u00adra\u00adti\u00adon in this case is deter\u00admi\u00adned by what the cus\u00adto\u00admer actual\u00adly pays, not by the pro\u00adceeds from the sale (Sec\u00adtion 17.1(6) of the VAT Imple\u00admen\u00adta\u00adti\u00adon Regu\u00adla\u00adti\u00adons). The sel\u00adler may only redu\u00adce their VAT to the ext\u00adent that they can pro\u00adve the debt is uncoll\u00adec\u00adti\u00adble. To do so, they must know what the buy\u00ader has reco\u00adver\u00aded from the deb\u00adtor. A debt purcha\u00adse agree\u00adment should the\u00adr\u00ade\u00adfo\u00adre obli\u00adge the buy\u00ader to dis\u00adc\u00adlo\u00adse the amounts recovered.<\/p>\n\n\n\n The receiva\u00adble sold is dere\u00adco\u00adg\u00adnis\u00aded in the balan\u00adce sheet. The loss ari\u00adsing from the sale redu\u00adces the pro\u00adfit, alt\u00adhough the VAT por\u00adti\u00adon must be trea\u00adted sepa\u00adra\u00adte\u00adly in accordance with the rules descri\u00adbed abo\u00adve. Under the cash-basis accoun\u00adting method, the purcha\u00adse pri\u00adce con\u00adsti\u00adtu\u00adtes ope\u00adra\u00adting inco\u00adme, as the receiva\u00adble had not pre\u00advious\u00adly been reco\u00adg\u00adnis\u00aded as income.<\/p>\n\n\n\n As long as a cla\u00adim is being hand\u00adled by a debt coll\u00adec\u00adtion agen\u00adcy or a law firm, it remains on the creditor\u2019s books. Whe\u00adther it requi\u00adres a wri\u00adte-down as at the balan\u00adce sheet date, and when VAT may be adjus\u00adted on the grounds of irre\u00adco\u00advera\u00adbi\u00adli\u00adty, depends on the stage of the pro\u00adcee\u00addings. A docu\u00admen\u00adted record of the pro\u00adcess, from the dun\u00adning pro\u00adce\u00addu\u00adre through to enforce\u00adment, helps to jus\u00adti\u00adfy this to the tax office. Fur\u00adther details can be found in our gui\u00adde Debt manage\u00adment for small busi\u00adnesses<\/a>.<\/p>\n\n\n\nThe key difference: the contradiction<\/h2>\n\n\n\n
When it might be worth using a debt collection agency<\/h2>\n\n\n\n
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When the journey to the law firm is shorter<\/h2>\n\n\n\n
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Tax considerations<\/h2>\n\n\n\n
VAT on debt collection and legal fees<\/h3>\n\n\n\n
Costs and reimbursements in the calculation of profit<\/h3>\n\n\n\n
Sale of receivables: VAT is not based on the purchase price<\/h3>\n\n\n\n
Receivables currently being recovered<\/h3>\n\n\n\n
Decision-making guide: Debt collection agency or law firm?<\/h2>\n\n\n\n