What is dunning or debt collection: the current situation and future prospects

What is dunning? Dunning, Debt collection or recovery has immediate and profound effects on the economy and on people’s lives. Starting from a general definition of what is dunning and a look at the current historical and legal context in Italy, we will look at how the debt collection process has evolved with digital transformation.

 

What is dunning – The creditor-debtor relationship

Debt collection is the relationship that is established between two parties (a creditor and a debtor) when the former attempts to obtain payment of a debt from the latter. All the activities are carried out in the case of non-payment by a debtor, which may be a private individual or a company, for products supplied or services offered by another company or public institution. The implementation of these actions is often delegated to a third party which is the debt collection agency.

What is dunning? “Dunning” is one term for this process, through which an attempt is made, although unsuccessfully, to obtain credit collection. Dunning is therefore a technical term, interchangeable with credit (or debit) collection.

Debt collection has its own history that is intertwined with that of the productive, economic, and financial activities of companies around the world. In the Italian case, this story is often told through two figures exemplifying the creditor-debtor relationship, which have symbolically embodied, in different eras, the forms in which a certain type of “national” culture had crystallized: these figures, which have above all a literary dimension, are “la pittima” and the “il piantone”.

 

Recovery of receivables: a brief look at history

What is the history of dunning? Debt collection is as old as the need to borrow money and consume goods or services produced by others, and as old as the parallel desire to lend money and sell those products or services. We can hypothesize with reasonable certainty that the need to collect what was owed to the creditor, within what is already configured as a complete debt relationship, also arose immediately. Debt collection agencies are only the most recent evolution of a long series of commercial and legal procedures and regulations designed to protect the creditor, to intervene in case of non-payment.

 

An ancient history

The history of debt collection therefore overlaps with a history of debt. Over time, regulation has served a number of purposes: to limit abuse of power, to restore the economy, and to prevent money and power from being concentrated in the hands of a few, becoming a threat to the sovereign’s power. Already in the sophisticated Babylonian civilization, for example, a system of laws had been developed that allowed creditors to collect debts and recover insolvent accounts, but at the same time also protected to some extent the rights of debtors (source: Odoardo Bulgarelli – fondazionecapriglione.luiss.it).

In the same way, the Jewish tradition had also developed a legal doctrine that had to both guarantee the recovery of the debt and contain and mitigate the risk of insolvency and slavery (source: Exodus 21.4 and Leviticus 25.44-46).

 

Debt and Italian folklore

Dating back to the first Italian Renaissance the tales feature a bizarre and petulant character dressed in red, “la pittima” who was paid by creditors to annoy the debtor. The pìttima chased the debtor relentlessly to remind him to pay his debt. Beyond the historical truth, which remains hazy, it was probably a public subject, employed directly by the State to promote the regularity of payments, in a historical period in which it was essential to ensure the success of exchanges. 

The Borbone of Naples in the mid-19th were also relentless in the collection of tax revenue, which was indispensable for the very survival of states with budgets in constant need of liquidity. The concept of “il piantone” was born in this context. Here, the taxpayer was forced to host a minimum of two soldiers of the royal army, in his house, offering them room and board, for a maximum of 10 days depending on the amount of debt. It was a form of indirect sanction that did not necessarily want to be punitive but had a deterrent effect (source: antrodichirone.com).

 

Debt collection: judicial and extrajudicial debt 

Now, we know what is dunning. Debt collection activities fall into two main categories: judicial debt collection and extrajudicial debt collection

In the case of extrajudicial debt collection, the actions taken do not involve judicial authorities. The entity appointed to recover the non payment cannot force the debtor, but must be able to communicate with him, trying to persuade him to pay the debt. 

In the case of judicial debt recovery, on the other hand, the creditor — after having tried unsuccessfully to obtain payment by means of out-of-court procedures — turns to the judicial authority which then intervenes through execution on the debtor’s assets.

A further general clarification on the concept of the credit: to be able to recover the non-payment, the credit in question must have three characteristics:

  • certainty: A sufficient number of elements must be present to prove its existence;
  • liquidity: the exact amount;
  • executability: based on the debtor’s actual assets, if there are no terms or conditions that prevent payment.

 

Actions of judicial debt collection

Judicial debt collection can only be carried out by lawyers or companies registered with the Bar Association, at the instigation of a legally authorized person and in the presence of an enforceable title (judgment, bill of exchange, etc.). It can be divided into a series of actions:

  • the injunctive decree: a formal measure by which the judge issues an order for payment, which can be followed by an adversarial hearing and, possibly, the attachment of the debtor’s assets;
  • the revocatory action and the conservative attachment (which protect the creditor): they allow seizure of the debtor’s assets, even if they had previously been sold;
  • attachment (in the presence of a judgement in favor of the creditor by the court): the forced seizure of the debtor’s property, whether movable or immovable, which is subsequently sold;
  • bankruptcy petition: final enforcement action that is put into practice in the absence of other assets (sources: visureitalia.com; creditpmi.it).

 

Professional debt collectors

Debt collection, if not implemented directly by the creditor, this is often delegated to other professional entities such as credit recovery agencies who:

  • have specific authorization;
  • do not act to recover their own receivables, but receivables from third parties.

The application for authorization must be submitted to the Police Headquarters or to SUAP – the Sportello Unico Attività Produttive, present in all Italian Municipalities. The SUAP is required to transmit the authorization to the competent Police Headquarters (sources: poliziadistato.it; agendadigitale.eu).

 

The operational context: the Italian situation

In Italy, the volume of debt contracted by families and businesses reached €82.3 billion in 2018. This included non-payment for home mortgages, financing installments for TVs or cars, utility bills, unsecured loans, or unpaid invoices. Half of these “forgotten” debts (48%, equal to 39.5 billion) were impaired loans, including NPLs (non-performing loans and exposures to parties in a state of insolvency) and old debts. Of these, 31% concerned businesses and 69% consumers (source: ilsole24ore.com). 

Following the spread of the Covid-19 pandemic, credit recovery is very complex, also in light of the fiscal measures that suspended obligations and tax payments as introduced by the government, which were initially introduced for the red zone of Lombardy and Veneto and, subsequently, for the entire national territory (Cura Italia decree – camera.it).

To get an idea of how this might work in such a period, we looked at research from the trade association of credit protection companies, UNIREC, and the Istituto Piepoli.

In an interview, Francesco Vovk, President of UNIREC (Credit market: what does the future hold?), said that credit recovery requires  “a precise management organization, a deep understanding of macro-economic phenomena, excellent technology, and a marked orientation towards problem solving towards the consumer debtor” (source: businesscommunity.it).

The article also states that it is “the ability to preserve the relationship with the debtor” that is becoming increasingly important. Such an objective can only be achieved by making full use of all the tools available and by putting to value the most advanced skills (technological, relational, communicative). According to Vovk, in fact, it is through investment in digital that the quality of service can be improved. 

Today, it will be necessary to review the customer journey in an improved way to better preserve the relationship between customer and debtor. In the particular post-Covid-19 context, it is necessary to adapt our mind maps to new working models and digital architectures.

 

The debt collection process: the reminder

The issue of the payment reminder is the central moment in the debt collection process. The reminder must be equipped with certain essential elements:

  • the title (the source of the right claimed by the creditor, e.g. the contract or estimate signed between the parties, reference to the outstanding invoice, etc.),
  • the exact amount to pay,
  • the term within which payment is requested,
  • the notice that the creditor, in case of further non-payment, may act in court.

The reminder can also be sent by the creditor himself without recourse to a law firm, possibly deciding to make use of specialist advice if the debtor continues to be in default (source: quifinanza.it).

 

The communication 

The law does not prescribe particular forms of communication to request payment. Among the most used tools to date to send the reminder we can name: 

  1. sending it by registered mail with return receipt;
  2. sending by certified email (now mandatory for businesses and professionals).

These two methods allow a proof of receipt of the message by the recipient and can be used in case of a subsequent appeal to the judicial authority.

Over time, the actions through which extrajudicial debt collection is structured have become more precise. The process, which is increasingly focused on communication activities towards debtors, has evolved in parallel with the diversification of media, and includes different formats to reach recipients, including through offline and online modes.

 

The new opportunities of digitization 

With the emergence of new technologies and the new communication possibilities offered by digital to the three traditional forms in which extrajudicial debt collection can be carried out (letter, telephone, tax collection) is added a fourth, digital, based on the use of tools such as interactive mail, apps, and interactive videos that are able to increase interaction and transparency

The commitment to the creation of increasingly sustainable, conciliatory, and personalized solutions is part of a different approach to credit recovery that also involves:

  • a more efficient and comprehensive mapping of legal discipline combined with a smart digital user interface;
  • the management of payments in electronic format;
  • the use of digital tools to communicate with the client.

This last aspect, digital tools, is particularly rich in potential.

To obtain real benefits from digitization generally requires a change in perspective, moving from managing the relationship with the customer to managing the experience with the customer, providing clear, immediate, and easy to use tools that put the user in a position to monitor the status of the practices and to proceed with the execution of some operations, in a shared management perspective, with benefits in terms of maintaining the relationship, monitoring the effectiveness of actions, and cost savings (source: 4clegal.com).