When to write a debt off, and when to keep going

Our starting point is that no debt should be written off lightly. Plenty of debts that look dead are not. But some genuinely are, and an honest answer is worth more than another invoice for work that cannot succeed.

These are the situations that make recovery difficult, and what, if anything, can still be done in each.

The debtor is bankrupt

Once a bankruptcy order is made, a creditor owed a debt that is provable in the bankruptcy has no remedy against the bankrupt person or their property for that debt, and cannot start court proceedings against them without the court's permission (section 285 of the Insolvency Act 1986).

In practice that means you submit a claim in the bankruptcy and receive whatever dividend the estate pays, if any. A bankrupt is usually discharged after one year, and discharge releases them from their bankruptcy debts.

The debtor is in an IVA

An individual voluntary arrangement binds every creditor who was entitled to vote on it, or who would have been entitled had they been given notice (section 260 of the Insolvency Act 1986). You are paid through the arrangement, not by chasing separately. The useful action is to make sure your claim is registered with the supervisor so you receive your share.

The debt is more than six years old

In England and Wales most debts become statute barred six years after payment fell due. The debt is not wiped out, but the debtor has a complete defence if you go to court. In Scotland the rule goes further: after five years without a relevant claim or acknowledgment, the obligation is extinguished.

Two points matter here. While the six years are still running, a signed written acknowledgment or a part payment restarts the clock. But once a debt is statute barred, a later acknowledgment or payment does not revive the right to sue (section 29 of the Limitation Act 1980). The debtor can still choose to pay, and some do, but it can no longer be enforced. We cover the time limits in more detail in how long you have to chase a debt.

The company has gone into liquidation

A limited company's debts belong to the company, not its directors. When a company is liquidated, you claim in the liquidation and receive any dividend paid to creditors. Directors often walk away, and in most cases they are entitled to. But there are routes worth checking before you give up:

• A personal guarantee. If a director personally guaranteed the account, often in a credit application or the terms of trade, you may be able to pursue them directly. Check your paperwork.
• A struck off company can be restored. A company that has been dissolved or struck off can, in many cases, be restored to the register by the court on the application of a creditor, generally within six years (sections 1029 and 1030 of the Companies Act 2006).
• The same business under a new company. Anyone who was a director in the year before a company went into insolvent liquidation is restricted, for five years, from being involved with another company using the same name or one similar enough to suggest a connection. A person who breaks that restriction is personally responsible for the debts of the new company (sections 216 and 217 of the Insolvency Act 1986).

Claims that a director traded wrongfully or fraudulently, or breached their duties, are generally brought by the liquidator rather than by individual creditors, and any money recovered goes to creditors as a whole. A personal claim in deceit against a director who lied to obtain credit is possible, but it requires proof of dishonesty and is rarely straightforward.

When to keep going

A debt is usually worth pursuing when:

• the debtor has income or assets, even if they say they do not;
• the debt is still within its time limit, or was acknowledged in writing while it was;
• someone gave a personal guarantee; or
• the debtor has simply moved or gone quiet, which is a tracing problem rather than a dead end.

When to stop

When the realistic recovery is smaller than the cost of getting it, the honest answer is to stop. We will tell you that at the assessment, before you spend anything, rather than taking an instruction we do not believe in. There is always a chance, but you should know how big a chance before you decide.