25 March 2024

Extrajudicial and Judicial Debt Collection

On January 19, 2024, the new Legal Regime for the Acts of Lawyers and Solicitors entered into force, as well as the amendments made to the Statute of the Bar Association.

Law No. 49/2004, of August 24, which governed until January 1, 2024, the nature and scope of the acts specific to lawyers and solicitors, was repealed by Law No. 10/2024, of January 19.

Among the new typified norms, the law now includes provisions regarding negotiation aimed at debt collection.

Although there was no specific provision for debt collection up to that point, at Castilho International Legal Corporation, compliance with rules and procedures has always been guided by rigor and transparency towards the client, both in information and in credit management, leading us to be sure that we have always been pioneers in Portugal in this matter.

In a pragmatic manner, debt collection can be carried out through extrajudicial or judicial recovery. The extrajudicial route will always be the first step in credit management, as it allows for an amicable resolution of the dispute, a reduction in recovery costs and expenses, and a saving in time. Essentially, the modus operandi of the extrajudicial phase consists of an initial approach to the debtor, urging them to comply, culminating in a payment agreement favorable to both parties.

The decision to request compliance through the sending of a letter is one that must be weighed based on the debtor's history. This means that in the presence or knowledge of the possibility of dissipation of the debtor's assets, the strategy must be adapted to ensure the success of the collection.

Let's see. Upon receiving the letter, three possibilities emerge:

  1. The debtor proceeds to immediate payment;
  2. The debtor ignores the letter and subsequent contacts;
  3. The debtor presents a payment agreement.

Depending on the action or omission of the counterparty's initiative, the credit management company should take a position regarding the procedure to be defined for recovery.

Considering the possibility of resolving the issue through a payment agreement, it should be formalized in a authenticated, detailed, and clear document that provides an enforceable title to the creditor.

In case of non-compliance or lack of cooperation from the debtor in the amicable resolution of the dispute, the creditor will have the possibility to resort to a set of means that allow for the coercive enforcement of the obligation to which the debtor is bound. The judicial enforcement process is one in which the creditor takes measures to seize the debtor's assets and income necessary to cover the amount of the debt and the costs of the process. Ultimately, there is the judicial sale of the debtor's assets and the delivery of the proceeds to the creditor, thus satisfying their debt.

The protection and management of recovered credits on behalf of third parties by the management company proves to be one of the major concerns in the drafting of Article 9 of the aforementioned Law No. 10/2024, as it establishes that companies holding funds from their clients must deposit the amounts into an account of the company, separate and designated as "client account," opened for this purpose in a bank or similar authorized institution, and these amounts must be payable on demand of the client or under the conditions accepted by the client. Furthermore, the company is required to maintain a complete and accurate record of all operations carried out with these funds, distinguishing them from other amounts held by the company, keeping such records available to the client.

It is important to note that it is not legitimate for the collecting entity to retain amounts for the purpose of paying fees or provisions, and for this purpose, the amounts recovered must be delivered to the client, subsequently issuing the respective fee note for the work performed.

That said, the mode and method for debt collection are constructed and refined by the experience and knowledge of the market applied to the current state of the economy and society. It is the study, awareness, and focus on results that have enabled Castilho International Legal Corporation to accumulate over 15 years of experience in credit recovery, both nationally and internationally.

Raquel Melo de Sousa

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