COMMON MISTAKES TO AVOID DURING DEBT COLLECTION IN NIGERIA

Navigating the Nuances of Debt Recovery with Prudence and Principle

Debt collection, while a critical aspect of financial health for individuals and businesses alike, is often fraught with potential pitfalls. In Nigeria’s dynamic economic and legal landscape, understanding these traps and proactively avoiding them is not just good practice – it’s essential for successful debt recovery, safeguarding your reputation, and avoiding legal repercussions.

This comprehensive guide will illuminate the common mistakes creditors and debt collectors make in Nigeria, offering actionable insights and highlighting the ethical and legal boundaries that must never be crossed. Whether you’re a small business owner, a large corporation, or an individual seeking to recover what’s owed, equipping yourself with this knowledge will pave the way for more efficient, effective, and compliant debt collection efforts.

Let’s dive in and demystify the art of ethical and effective debt recovery in Nigeria!

The Foundation: Understanding the Nigerian Debt Recovery Landscape

Before we delve into the mistakes, it’s crucial to grasp the fundamental principles governing debt recovery in Nigeria. Unlike some jurisdictions, Nigeria’s legal framework for debt collection is primarily rooted in common law principles, supplemented by various statutes and rules.

Key Legal Frameworks:

• Nigerian Constitution: Serves as the supreme law, protecting fundamental human rights, including dignity of person, privacy, and fair hearing. Any debt collection practice infringing on these rights is unlawful.
• Contract Law: Most debt arises from contractual agreements. Nigerian contract law, derived from English common law, dictates the rights and obligations of parties.
• Limitation Act/State Limitation Laws: These laws set time limits (statutes of limitations) within which legal action for debt recovery can be initiated. For simple contracts, this is generally six years from the date the debt became due.
• Civil Procedure Rules (State and Federal High Courts): These rules outline the procedures for initiating and conducting debt recovery actions in court.
• Companies and Allied Matters Act (CAMA): Includes provisions relevant to debt recovery from corporate entities, including winding-up proceedings.
• Asset Management Corporation of Nigeria (AMCON) Act: Specifically deals with the acquisition and recovery of non-performing loans from banks.
• Secured Transactions in Movable Assets Act 2017 (STMA Act): Provides a framework for security interests in movable assets, facilitating debt recovery through collateral.

Crucial Distinctions:

• Civil vs. Criminal Matter: It’s vital to remember that owing a debt is a civil matter, not a criminal one in Nigeria. This is a frequent misconception that leads to significant mistakes. The police generally have no jurisdiction in pure debt recovery cases unless the debt was incurred through a criminal act like issuing a dud cheque or fraudulent misrepresentation.
• Self-Help is Illegal: The Nigerian legal system strongly frowns upon “self-help” in debt recovery. This means you cannot resort to force, intimidation, or unlawful seizure of property to recover a debt. All recovery efforts must follow due process.

Now, with this foundational understanding, let’s explore the common missteps to avoid.

Mistake 1: Insufficient Documentation and Record Keeping

Imagine going to court to prove someone owes you money, and all you have are verbal promises and scattered notes. It’s like trying to build a house without a blueprint! This is arguably the most fundamental and far-reaching mistake in debt collection.

Why it’s a mistake:

• Lack of Proof: Without concrete documentation, proving the existence of the debt, the agreed-upon terms, and the outstanding amount becomes incredibly difficult in a legal setting. “He said, she said” arguments rarely win in court.
• Disputes: Debtors can easily dispute the debt amount, terms, or even its existence if you don’t have clear records. This prolongs the recovery process and increases costs.
• Legal Inadmissibility: Many informal records may not be admissible as evidence in court, rendering your efforts futile.
• Statute of Limitations Confusion: Proper records help you track the date the debt became due, which is crucial for adhering to the statute of limitations.

What to do instead:

• Comprehensive Written Agreements: Always have clear, legally binding written agreements (contracts, loan agreements, invoices, promissory notes) outlining the terms of the debt, repayment schedule, interest rates, penalties for late payments, and any collateral. Ensure both parties sign and retain copies.
• Detailed Transaction Records: Maintain meticulous records of all payments made (or not made), including dates, amounts, and methods.
• Correspondence Trail: Keep all communications with the debtor, whether emails, letters, text messages, or notes from phone calls. These can provide valuable insights into the debtor’s intentions and any disputes raised.
• Proof of Service/Delivery: For goods or services, maintain records of delivery notes, completion certificates, and client acknowledgements.
• Regular Reconciliation: Regularly reconcile your accounts to accurately track outstanding debts and identify overdue payments promptly.

Interactive Insight: Think about your current record-keeping system. Are there any gaps? What steps can you take today to improve your documentation for future transactions? Share your ideas in the comments below!

Mistake 2: Delaying Action – The “Wait and See” Approach

It’s tempting to be patient, especially with clients or friends you’ve had good relationships with. However, procrastination in debt collection is a costly mistake. The longer you wait, the harder it often becomes to recover the debt.

Why it’s a mistake:

• Deteriorating Debtor Situation: A debtor’s financial situation can worsen over time. What might be a temporary cash flow issue today could become full-blown insolvency tomorrow.
• Decreased Urgency for Debtor: If you don’t show urgency in pursuing the debt, the debtor may not feel any urgency to pay it back.
• Loss of Contact: Debtors might change addresses, phone numbers, or even leave the country, making them harder to locate.
• Statute of Limitations: As mentioned, there’s a legal window for recovery. Delaying can lead to your debt becoming “statute-barred,” meaning you lose the legal right to sue for it.
• Evidence Fades: Memories fade, documents get lost, and witnesses may become unavailable over time, weakening your case.

What to do instead:

• Early Intervention: As soon as a payment is overdue, initiate polite but firm communication.
• Clear Payment Deadlines: Establish and communicate clear payment deadlines from the outset.
• Automated Reminders: Implement automated systems for sending payment reminders before and after due dates.
• Escalation Protocol: Have a clear internal protocol for escalating debt collection efforts based on the age of the debt (e.g., 30 days overdue, 60 days overdue, etc.).
• Prompt Demand Letters: If initial informal attempts fail, issue a formal demand letter promptly. This is often a prerequisite for legal action.

Interactive Insight: Have you ever waited too long to chase a debt? What were the consequences? What could you have done differently?

Mistake 3: Resorting to Illegal and Unethical Collection Tactics

This is where many well-intentioned creditors (and even some professional collectors) stumble, turning a legitimate pursuit into a potential legal nightmare for themselves. The temptation to resort to aggressive, intimidating, or unlawful methods can be high when faced with a recalcitrant debtor, but the consequences are severe.

Why it’s a mistake (and illegal!):

• Violation of Debtor Rights: Nigerian law protects the fundamental human rights of debtors, including their right to dignity, privacy, and freedom from harassment.
• Criminal Charges: Engaging in tactics like threats of violence, unlawful detention, physical assault, or public shaming can lead to criminal charges against you.
• Civil Lawsuits: Debtors can sue you for damages for breach of their fundamental human rights, assault, battery, defamation, or false imprisonment. This can result in significant financial penalties, far outweighing the original debt.
• Reputational Damage: Unethical collection practices can severely damage your or your business’s reputation, leading to loss of customers and public trust.
• Ineffectiveness: While such tactics might seem to work in the short term, they often harden the debtor’s resolve not to pay and make amicable resolution impossible. They also make any future legal recourse more difficult.
• Police Involvement (Against You!): As stated, the police are generally not involved in civil debt recovery. However, if you commit a crime while attempting to collect a debt, you will find yourself on the wrong side of the law, with the police investigating you.

Prohibited Tactics in Nigeria (and what to avoid):

• Threats of Arrest or Police Involvement: As reiterated, owing a debt is not a crime. Threatening to involve the police for a civil debt is illegal and can backfire. The police are for preventing and investigating crimes, not acting as debt collectors.
• Harassment and Intimidation:
  • Excessive and Frequent Calls: Repeatedly calling at unreasonable hours (e.g., late at night, very early morning).
  • Abusive Language: Using profanity, insults, or demeaning language.
  • Threats of Violence or Harm: Any physical threats.
  • Showing Up Unannounced and Aggressively: Confronting debtors at their homes or workplaces in a threatening manner.
• Public Shaming/Defamation:
  • Publishing the debtor’s name, debt details, or financial struggles in public (e.g., newspapers, social media, notice boards).
  • Contacting the debtor’s family, friends, neighbors, or employer (beyond a single, polite attempt to verify location information, without disclosing the debt).
• Unlawful Seizure of Property: You cannot forcibly take a debtor’s assets without a court order (e.g., a garnishee order or writ of execution). This is a serious offense.
• Misrepresentation:
  • Falsely claiming to be a law enforcement officer or a lawyer when you are not.
  • Misrepresenting the amount owed, adding unauthorized fees, or claiming legal consequences that are not applicable.
  • Threatening legal action you have no intention or legal right to pursue.
• Issuing Dud Cheques (by Debtor): While not a mistake by the collector, it’s worth noting that if a debtor issues a dud cheque to pay a debt, this is a criminal offense, and you can involve law enforcement. However, the original debt itself remains a civil matter.

What to do instead:

• Adhere to Legal Procedures: Understand and strictly follow the legal steps for debt recovery, including sending demand letters and, if necessary, initiating court proceedings.
• Professional and Respectful Communication: Maintain a professional and respectful tone in all interactions. Focus on facts and solutions, not emotions or accusations.
• Engage Legal Professionals: If amicable efforts fail, engage a reputable lawyer or a professional, ethical debt collection agency. They understand the legal boundaries and how to navigate the process compliantly.
• Explore ADR (Alternative Dispute Resolution): Mediation and arbitration can be effective and less confrontational ways to resolve debt disputes.

Interactive Insight: Have you ever witnessed or been a target of unethical debt collection practices? How did it make you feel? What, in your opinion, is the biggest deterrent against such practices in Nigeria?

Mistake 4: Failing to Understand and Utilize Legal Recourse (Properly)

While self-help is forbidden, ignoring legal avenues or mismanaging them can be equally detrimental. Many creditors either shy away from court due to perceived complexity and cost or jump into it without proper preparation.

Why it’s a mistake:

• Loss of Enforcement Power: Without a court judgment, you lack the legal power to compel a debtor to pay, seize assets, or garnish wages/accounts.
• Wasted Resources: Initiating legal action without proper documentation or understanding the process can lead to wasted time, money, and a dismissed case.
• Prolonged Process: Court processes can be lengthy in Nigeria. Missteps can prolong them further.
• Ignoring Statute of Limitations: Failing to file a lawsuit within the prescribed time limit means you lose your right to sue, making the debt practically unrecoverable through legal means.

What to do instead:

• Know the Statute of Limitations: Be aware of the six-year limitation period for simple contracts and act well within it. A partial payment or written acknowledgment by the debtor can reset this period, but rely on this cautiously.
• Proper Demand Letters: Issue a formal demand letter as a prerequisite to legal action. It signals your seriousness and provides the debtor with a final opportunity to pay.
• Explore the “Undefended List” Procedure: For straightforward, undisputed debts, this procedure in some High Courts can expedite judgment without a full trial.
• Understand Enforcement Mechanisms: If you obtain a judgment, know how to enforce it:
  • Garnishee Proceedings: Targeting funds held by the debtor in a bank account. This is often very effective.
  • Writ of Fieri Facias (FiFa): Seizing and selling movable property.
  • Writ of Attachment and Sale: For seizing and selling immovable property (land, buildings).
  • Winding-Up Proceedings (for companies): If the debtor is a company, you can petition the court to wind it up if it’s insolvent and unable to pay its debts.
  • Committal Proceedings: If a debtor deliberately disobeys court orders, they can be held in contempt of court and potentially jailed (though this is rare and for contempt, not for the debt itself).
• Professional Legal Counsel: Engage experienced legal practitioners specializing in debt recovery. They can advise on the best legal strategy, prepare the necessary documents, and represent you in court. Don’t attempt to navigate complex legal procedures without expert guidance.

Interactive Insight: What are your perceptions about engaging lawyers for debt recovery in Nigeria? Are they seen as a last resort, or a proactive step? How can these perceptions be shifted?

Mistake 5: Poor Communication and Relationship Management

Even in debt collection, communication is key. Abrasive, unclear, or inconsistent communication can alienate debtors, making them less likely to cooperate and potentially forcing them into a defensive stance.

Why it’s a mistake:

• Damaged Relationships: While recovering debt is the priority, maintaining a professional relationship (especially with a previously good client) can be beneficial for future business or referrals.
• Misunderstandings: Unclear communication can lead to confusion about the debt amount, due dates, or repayment options.
• Lack of Cooperation: Debtors are less likely to engage in constructive dialogue or agree to payment plans if they feel disrespected or threatened.
• Escalation to Disputes: Poor communication can turn simple overdue payments into complex disputes.

What to do instead:

• Clear and Concise Language: Use plain language, avoiding legal jargon where possible, to clearly state the debt, the amount owed, the due date, and the expected action.
• Professional Tone: Maintain a professional, firm but empathetic tone in all communications.
• Active Listening: If the debtor responds, listen to their reasons for non-payment. There might be genuine hardship that can lead to a mutually agreeable solution.
• Document All Conversations: Keep detailed notes of phone calls and meetings, including dates, times, attendees, key discussion points, and agreed-upon actions.
• Offer Flexible Payment Solutions: Where appropriate and feasible, be open to discussing payment plans, installments, or partial settlements. This shows willingness to work with the debtor and can increase the likelihood of recovery.
• Consistent Follow-Up: Follow up consistently, but avoid harassment. A structured follow-up schedule is more effective than sporadic, aggressive bursts.
• Designated Contact Person: Have a designated person or team handle debt collection to ensure consistency in communication.

Interactive Insight: Have you ever been more willing to resolve an issue because of how someone communicated with you, even if the news was difficult? How can debt collectors apply this principle?

Mistake 6: Lack of Due Diligence and Background Checks

Lending money or offering credit without proper vetting is like throwing money into the wind. This upfront mistake often leads to collection difficulties down the line.

Why it’s a mistake:

• High Risk of Default: You might extend credit to individuals or businesses with a history of non-payment or poor financial standing.
• Difficulty in Locating Debtors: If basic contact information is incorrect or incomplete from the start, locating the debtor later becomes a “skip tracing” nightmare.
• Inability to Assess Recovery Potential: Without understanding a debtor’s financial capacity or assets, you can’t realistically assess the chances of recovery or strategize effectively.

What to do instead:

• Credit Checks: For significant loans or credit, conduct thorough credit checks through credit bureaus.
• Reference Checks: Request and verify business or personal references.
• Company Searches (for corporate debtors): Conduct Corporate Affairs Commission (CAC) searches to ascertain the company’s status, directors, and registered address.
• Due Diligence on Collateral (if applicable): If collateral is involved, ensure its value, ownership, and enforceability are thoroughly verified.
• “Know Your Customer” (KYC) Principles: Collect accurate and verifiable contact information (physical address, phone numbers, email addresses).
• Assess Ability to Pay: Before extending credit, try to assess the debtor’s financial capacity and stability.

Interactive Insight: In Nigeria, what are some of the challenges in conducting thorough due diligence before extending credit? How can these challenges be mitigated?

Mistake 7: Failing to Consider Alternative Dispute Resolution (ADR)

Many creditors jump straight to litigation, viewing it as the only “real” solution. However, neglecting ADR mechanisms can be a significant oversight.

Why it’s a mistake:

• Cost and Time: Litigation in Nigeria can be expensive and notoriously time-consuming, sometimes stretching for years.
• Preservation of Relationships: ADR, particularly mediation, is often less adversarial and can help preserve business relationships, which is beneficial if the debtor is also a potential future client.
• Flexibility of Solutions: ADR allows for more creative and flexible solutions tailored to both parties’ needs, unlike court judgments which are often rigid.
• Privacy: ADR proceedings are typically private, unlike court cases which are public.

What to do instead:

• Mediation: A neutral third party facilitates discussions to help both sides reach a mutually acceptable agreement. This is often the first and most effective ADR step for debt disputes.
• Arbitration: A neutral third party hears both sides and makes a binding decision. While more formal than mediation, it’s generally faster and less formal than court.
• Negotiation: Direct discussions between the creditor and debtor, or their representatives, to reach a repayment agreement. This should always be the initial approach.

Interactive Insight: When would you consider ADR a more suitable option than litigation for debt recovery in Nigeria? Are there specific types of debts or debtors for whom ADR is particularly well-suited?

Mistake 8: Not Knowing When to Cut Your Losses or Write Off a Debt

Sometimes, despite all efforts, a debt may simply be unrecoverable. Persisting indefinitely can be a drain on resources that could be better spent elsewhere.

Why it’s a mistake:

• Wasted Resources: Continuing to pursue a debt from an insolvent or unreachable debtor consumes valuable time, money, and manpower that could be directed towards more fruitful endeavors.
• Emotional Toll: Prolonged and unsuccessful debt collection can be emotionally draining.
• Accounting Implications: Unrecoverable debts tie up assets on your books.

What to do instead:

• Realistic Assessment: Conduct a realistic assessment of the debtor’s ability to pay and the cost-effectiveness of continued recovery efforts. Is the debtor truly insolvent? Are they simply untraceable?
• Financial Advisers: Consult with financial advisors or accountants to understand the implications of writing off a debt for your business.
• Strategic Write-Offs: Sometimes, writing off a small, genuinely uncollectible debt is a strategic business decision to free up resources.
• Partial Settlements: Be open to accepting a partial settlement if it’s the only way to recover some of the money, rather than nothing at all.
• Bad Debt Provisions: For businesses, implement sound accounting practices, including making provisions for bad debts.

Interactive Insight: How do you decide when to stop pursuing a debt? What factors weigh most heavily in that decision?

Concluding Thoughts: Mastering the Art of Debt Collection in Nigeria

Debt collection in Nigeria is a nuanced process that demands a blend of legal knowledge, ethical conduct, strategic thinking, and diligent execution. By actively avoiding the common mistakes outlined above, creditors can significantly enhance their chances of successful debt recovery while safeguarding their legal standing and reputation.

Remember, the goal is not just to recover the debt but to do so efficiently, compliantly, and with an understanding of the intricate legal and human dynamics involved. Prioritize clear documentation, act promptly, adhere strictly to ethical and legal boundaries, and leverage professional expertise when needed. Embrace alternative dispute resolution where appropriate, and most importantly, remember that self-help is a path fraught with danger and legal peril.

Your turn! What is the single most important takeaway you’ve gathered from this discussion about debt collection in Nigeria? What changes will you implement in your own approach to debt recovery going forward? Share your thoughts and continue the conversation!