Should You Use Debt Collection or Take Legal Action?

Debt collection in Singapore can be handled in two main ways—hiring a debt collection agency or pursuing legal action. When debtors refuse to pay, creditors often struggle to decide which route is more effective, cost-efficient, and time-saving.

While debt collection agencies focus on negotiating and recovering unpaid debts without court involvement, legal action involves filing a lawsuit to obtain a court order for repayment. Choosing the right approach depends on factors such as the amount owed, the debtor’s willingness to pay, legal costs, and the time required for resolution.

This guide outlines the key differences between debt collection agencies and legal action, helping you determine the best way to recover what you’re owed.

1. Understanding Debt Collection Agencies and Legal Action

Before making a decision, it’s crucial to understand how both processes work.

• Debt collection agencies act as intermediaries between creditors and debtors, using negotiation, persistent follow-ups, and structured repayment plans to secure payment. They operate within legal boundaries but do not have the authority to enforce repayment through legal measures.
• Legal action is a formal process where creditors take debtors to court to seek a legally enforceable judgment. This can involve court hearings, legal representation, and possible asset seizures to recover the owed amount.

Knowing when to hire a debt collection agency versus when to pursue legal action can save valuable time and money while increasing the chances of successful debt recovery.

2. How Debt Collection Agencies Work

Many creditors turn to debt collection agencies as a first step before considering legal action. These agencies specialise in recovering unpaid debts through persistent communication and strategic pressure.

What Debt Collection Agencies Do:

• Persistent Follow-Ups: Agencies contact debtors repeatedly via calls, emails, and letters to push for payment.
• Issuing Demand Letters: Formal letters are sent, clearly stating the debt amount, deadline for payment, and potential consequences of non-payment.
• Negotiating Repayment Plans: Some debtors may struggle with financial difficulties. Agencies help set up structured payment plans that work for both parties.
• Escalating Collection Efforts: If the debtor continues to delay payment, agencies may report unpaid debts to credit bureaus, affecting the debtor’s credit standing.

Because of their structured and results-driven approach, businesses prefer hiring a debt collection agency before considering legal action.

3. How Legal Action Works

Legal action is a more complex and formal process that involves obtaining a court ruling to enforce repayment. This method is used when other collection efforts have failed or when the debt is disputed.

What Legal Action Involves:

• Filing a Claim in Court: Creditors can take their case to the Small Claims Tribunal for debts up to SGD 30,000 or pursue civil court litigation for larger amounts.
• Court Hearings and Evidence Presentation: Both parties present their arguments before a judge, who determines the validity of the claim.
• Enforcing a Court Order: If the judge rules in favour of the creditor, legal measures such as asset seizure or wage garnishment may be used to recover the debt.

Since legal action can be expensive and time-consuming, it is often considered a last resort after all other collection attempts have failed.

4. Comparing the Costs of Debt Collection and Legal Action

The cost of debt recovery plays a significant role in deciding whether to hire a collection agency or take legal action.

Debt collection agencies typically charge a commission fee, usually a percentage of the amount recovered. This means there are no upfront costs, and you only pay if the agency successfully recovers the debt. However, commission fees can range from 10% to 50%, depending on the complexity of the case and the agency’s policies.

Legal action, on the other hand, requires court filing fees, lawyer fees, and other legal costs. These expenses can add up quickly, especially if the case drags on for months or years. While court rulings are legally enforceable, there is still no guarantee of immediate repayment, as the debtor may continue to delay or dispute the debt.

If the amount owed is relatively small, hiring a debt collection agency is often the more cost-effective and practical choice.

5. Speed of Debt Recovery

The urgency of debt recovery is another key factor.

Debt collection agencies typically recover debts within weeks or months, depending on the debtor’s responsiveness. Since they focus on persistent follow-ups and direct negotiations, they often achieve quicker results compared to legal action.

Legal action, however, is significantly slower. A court case can take several months or even years, depending on its complexity and whether the debtor contests the claim. Even after obtaining a favourable ruling, enforcement measures may take additional time.

For businesses in need of immediate cash flow, debt collection agencies provide a much faster alternative.

6. When Debt Collection Agencies Are the Better Option

Debt collection agencies are generally the best choice in the following situations:

• The debtor is unresponsive but has the financial ability to pay. If they are ignoring reminders but not disputing the debt, a collection agency can apply the necessary pressure.
• The amount owed is below SGD 30,000. Legal fees may not be justifiable for smaller debts.
• You need fast debt recovery. If cash flow is a concern, hiring an agency is the quickest solution.
• You want to avoid legal complexities. Debt collection avoids the delays and expenses of litigation.
• Maintaining a business relationship is important. Collection agencies focus on recovery while preserving professional relationships where possible.

7. When Legal Action Is the Better Option

Legal action is more appropriate in cases where:

• The debt amount is significant (SGD 50,000 and above). Larger sums may justify the cost and effort of legal proceedings.
• The debtor disputes the debt. If the debtor refuses to acknowledge the debt or challenges its validity, legal intervention may be necessary.
• Previous collection attempts have failed. If a debt collection agency is unsuccessful, a legal ruling may be required to enforce repayment.
• The debtor has assets that can be seized. If the debtor has valuable assets, legal action can help secure repayment through asset liquidation.

In situations where the debtor is deliberately avoiding payment despite having the financial means, taking the case to court may be the only way to secure the debt.

8. Making the Right Decision: A Step-by-Step Guide

To determine whether debt collection or legal action is the best approach, follow these steps:

1. Assess the debt amount. If it’s relatively small, a collection agency is usually the best option.
2. Consider the debtor’s response. If they communicate but delay payment, a collection agency is more effective.
3. Compare costs. If legal fees outweigh the debt amount, hiring an agency is the smarter choice.
4. Determine urgency. If you need quick recovery, legal action is often too slow.
5. Review past efforts. If collection agencies have already tried and failed, litigation may be the last resort.

Final Thoughts

Choosing between debt collection agencies and legal action depends on cost, speed, and success rates. In most cases, hiring a debt collection agency is the faster, more cost-effective solution. However, if the debt is large and disputed, legal action may be the only way forward.

Understanding when to hire a debt collection agency can help businesses avoid unnecessary legal expenses while maximising recovery chances.