Debt collection in Germany is a nightmare for non-German businesses.
Table of Contents
Commercial debt collection in Germany is a crucial aspect of managing business finances, especially for small businesses. Germany has a robust legal framework for debt collection, with a focus on amicable resolution and court proceedings when necessary. This guide provides an in-depth understanding of the debt collection process in Germany, including the target audience, the role of debt collection agencies, and the legal considerations.
How to successfully manage receivables in the German market in 10 steps:
1. Understand the impact of Days Sales Outstanding (DSO)
- DSO measures the average number of days to collect payment after a sale.
- High DSO values strain liquidity and cash flow.
- Manage DSO effectively to maintain financial health, especially in Germany where payment terms are often longer.
“One of the best ways to improve a company’s cash flow is to speed up the amount of time it takes for customers to pay their invoices.”
2. Be aware of strict time limitations
- Legal time frames for debt collection are strictly enforced in Germany
- The general prescription period (Verjährungsfristen) in Germany is three years
- Address overdue payments promptly to avoid losing legal rights and making debt recovery more difficult
3. Familiarize yourself with SCHUFA credit scores
- SCHUFA is a credit reporting agency that plays a significant role in the German financial system
- SCHUFA scores assess creditworthiness and influence access to credit, property rentals, and financial transactions
- Non-German entities should understand the impact of SCHUFA scores and maintain a positive credit profile
| Schufa Score Range | Credit Rating | Meaning |
| 90-100% | Very Good | Individuals with a score in this range have a very good credit rating, indicating a low risk of defaulting on loans or credit cards. |
| 80-89% | Good | Individuals with a score in this range have a good credit rating, indicating a relatively low risk of defaulting on loans or credit cards. |
| 70-79% | Satisfactory | Individuals with a score in this range have a satisfactory credit rating, indicating an average risk of defaulting on loans or credit cards. |
| 50-69% | Sufficient | Individuals with a score in this range have a sufficient credit rating, indicating a higher risk of defaulting on loans or credit cards. |
| 0-49% | Poor | Individuals with a score in this range have a poor credit rating, indicating a very high risk of defaulting on loans or credit cards. |
4. Navigate the complex legal framework
- The debt collection process in Germany is governed by the German Civil Code, which outlines the requirements for recognizing and enforcing foreign debt collection orders.
- The dunning process (Mahnverfahren) is a common pre-legal step to formally notify debtors of outstanding debts
- Pursue legal action through the courts if amicable settlements cannot be reached
- Bundesverband Deutscher Inkasso-Unternehmen e.V. (BDIU) – Federal Association of German Collection Agencies
- The BDIU is the leading professional association for debt collection agencies in Germany. It represents the interests of its members and promotes high quality standards and fair practices in the debt collection industry.
- Website:https://www.inkasso.de/
- Bundesverband Credit Management e.V. (BvCM) – Federal Association of Credit Management
- The BvCM is a professional association focused on credit management and risk management. It provides training, networking opportunities, and resources to help businesses effectively manage credit risks and optimize their receivables management processes.
- Website:https://www.credit-manager.de/
- Deutscher Sparkassen- und Giroverband (DSGV) – German Savings Banks Association
- The DSGV represents the interests of the German Sparkassen-Finanzgruppe (Savings Banks Finance Group), which plays a significant role in providing financial services to businesses, including debt collection and restructuring services.
- Website:https://www.dsgv.de/
- Bundesverband deutscher Banken (BdB) – Association of German Banks
- The BdB is the leading banking association in Germany, representing the interests of private commercial banks. Many of its member banks offer debt collection and restructuring services to their business clients.
- Website:https://bankenverband.de/
- Verband Insolvenzverwalter Deutschlands e.V. (VID) – German Insolvency Administrators Association
- The VID is a professional association for insolvency administrators in Germany. Its members are involved in managing insolvency proceedings and restructuring efforts for businesses facing financial difficulties.
- Website:https://www.vid.de/
- Bundesministerium der Justiz (BMJ) – Federal Ministry of Justice
- While not directly involved in debt collection, the BMJ is responsible for the legal framework surrounding insolvency and debt restructuring in Germany. It provides information and resources on the insolvency process and debt relief options.
- Website:https://www.bmj.de/
5. Choose a reliable debt collection partner
- The debt collection procedure in Germany can be completed by an agency or a law firm. Creditors are encouraged to start enforcement proceedings right away if they think the debtor may be the subject of legal actions. If a judgment for debt collection is rendered in a foreign country, it is wise to seek legal advice regarding the judgment’s enforceability.
- Consider factors such as industry expertise, multilingual capabilities, and familiarity with German legal and cultural norms
- Contingency fee agreements in Germany are rare. In many cases lawyers are prohibited from agreeing to a contingency fee agreement by the German law.
“Selecting a reliable debt collection agency is crucial for successfully navigating the German market.”
6. Seek assistance from experienced professionals
- Engage debt collection agencies or legal professionals familiar with the German system to navigate complexities and minimize frustrations
- Resources like Expert Planet (expertplanet.io) provide insights, support, and tailored solutions for managing receivables in Germany
7. Consider amicable settlement options
- The amicable debt collection procedure in Germany is the simplest way of recovering money from a bad payer and implies the creditor to reach an agreement with the debtor. This can be completed by an agency or a law firm that can recover the money on behalf of the creditor. The debt collection agency will still be required to send the debtor a notification and proof of the unpaid amount at the same time, along with a proposal for the recovery of the amount owed. Based on the positive reply of the debtor, an agreement will be signed, and the debt collection procedure will be successfully closed.
- Amicable settlements can help avoid costly legal proceedings and preserve business relationships
8. Be prepared for cultural differences and language barriers
Communication Styles
Different cultures have varying communication styles. For example, some cultures are more direct in their communication, while others may prefer indirect or subtle approaches. Understanding these differences is crucial for effective communication with debtors.
Approach to Debtors
Cultural backgrounds can influence how debtors respond to debt collection efforts. Some debtors may feel ashamed, angry, or busy, affecting their willingness to engage in discussions about their debts. Tailoring the approach based on the debtor’s personality, attitude, and cultural background can lead to more successful outcomes.
Cultural Sensitivity
Debt collectors need to be culturally sensitive when interacting with debtors from different backgrounds. Showing respect for cultural norms and customs while maintaining professionalism is essential for building trust and fostering productive communication during the debt collection process.
Understanding Cultural Differences
Being aware of cultural differences in communication styles, negotiation practices, and social norms is key to avoiding misunderstandings and ensuring effective debt recovery efforts. Debt collectors should adapt their approach based on the cultural background of the debtor to facilitate better communication and cooperation.
Language Barriers
Language barriers can complicate debt collection efforts. Utilizing native speakers who can communicate with debtors in their native language can help avoid misunderstandings and keep conversations clear and effective. Native speakers understand the cultural nuances that impact communication, making them valuable assets in debt collection processes.
Personal Contact vs. Written Communication
While written communication is important for record-keeping and documentation, personal contact through phone calls remains crucial for establishing rapport and addressing specific issues with debtors. Understanding when to use written communication versus personal contact is essential for successful debt recovery
9. Understand the limitations and challenges
- Strong debtor protection laws, strict privacy regulations, and the cost of legal action can limit creditor options
- Enforcement difficulties, cross-border issues, and the inefficiency of the dunning process can be frustrating
- Assess the cost-benefit of pursuing small debts and consider the potential impact on business relationships
10. Stay informed and proactive
- Keep up-to-date with changes in German debt collection regulations and best practices
- Regularly monitor and manage receivables to identify and address issues early
- Seek professional advice and support when needed to successfully navigate the German market
Court Debt Collection in Germany
The first judicial step for debt collecting is by submitting a writ before the competent court in which to specify the amount of the debts, the claim, and the documents that indicate the debts. The debtor is also informed by the court about the creditor’s proceedings and has the right to appeal against the writ within four weeks, in which case the court schedules a court date for a personal hearing of the parties. If the debtor does not respond to the court’s document of information or does not come to the scheduled date for the hearing, the claimant is awarded a judgment in the absence or default judgment.
Collecting debts in Germany can be a hassle for non-German entities, with real frustrations that impact cash flow and financial health. However, by understanding the complexities, seeking expert assistance, and adopting a proactive approach, you can successfully manage receivables and get your money back.
Understanding the debt collection process in Germany is essential for businesses to protect their financial interests. By working with debt collection agencies and legal professionals, creditors can navigate the complexities of debt collection and recover outstanding debts.
Don’t let the challenges of debt collection in Germany hinder your business success. Take action today to safeguard your financial health and build strong, lasting relationships with your German partners.
What is the basis of law in Germany?
The legal system in Germany is based on the civil law tradition. The
majority of law in Germany is codified. However, there is some
continuing (but fading) influence of customary law. Germany is one of
28 member states of the European Union (EU) and is therefore subject
to EU legislation.
The German court structure comprises:
Ordinary courts (Local Courts, Regional Courts, Higher Regional Courts,
Federal Court of Justice);
Administrative courts (Administrative Court, Higher Administrative Court, Federal Administrative Court);
Finance/Tax courts (Finance Court, Federal Finance Court); and
Social courts (Social Court, Higher Social Court, Federal Social Court).
A lawyer in Germany is known as a Rechtsänwalt.
How is the legal profession regulated?
The legislation which governs the legal profession in Germany is the Federal Lawyers’ Act (“Bundesrechtsanwaltsordnung”,
BRAO) and the Legal Services Act vom 12.12.2007 (“Rechtsdienstleistungsgesetz”, (RDG)).
Lawyers are also subject to the Lawyers Professional Code of Conduct (Berufsordnung der Rechtsanwälte).
Is a no-win no-fee agreement legal in Germany ?
In Germany, lawyers usually can’t use “no win, no fee” deals. This rule is to keep legal advice fair and independent. However, in some cases, like big commercial lawsuits, lawyers can agree on contingency fees if certain conditions are met. These rules help make sure legal fees are reasonable and protect the quality of legal advice.
So, while not common, there are some situations where lawyers can use these agreements, but they have to follow strict guidelines to keep things fair for everyone involved.
Does this rule apply to debt collection agencies?
The rule against “no win, no fee” agreements in Germany generally applies to lawyers and law firms. However, debt collection agencies in Germany operate under different regulations and procedures. Debt collection agencies can charge debt collection costs to debtors under the German Civil Code, specifically paragraph 280, sections 2 and 3, and paragraph 286.
While lawyers are restricted from using contingency fees, debt collection agencies have more flexibility in charging debt collection costs to debtors within the legal framework of Germany.
