Practical Guide To International Debt Collection in Germany

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Germany

Is there a minimum amount to start a legal action?

In Germany, there is no minimum amount required in order to start court proceedings.

The minimum fees for lawyers and for judicial fees are calculated according to the amount in dispute. For example, if the amount in dispute is €1,500, the total minimum lawyer`s fees for extrajudicial work and appearance before the Court plus judicial fees will amount to about €600 (excl. V.A.T.). The client will, therefore, have to decide if trying to recover the debt is cost-effective in relation to the size of the claim.

Will the amount due condition the type of procedure?

The amount due determines the Court before which proceedings should be initiated:

For amounts of €5,000 or less, the district court (Amtsgericht) has competence; above €5,000, the county court (Landgericht) has competence.

As an alternative, irrespective of the amount due, the creditor can initiate an Order for Payment Procedure (“Mahnverfahren”) before the competent district court. This is a fast and automatic procedure without a hearing.

To initiate the procedure, the creditor must demonstrate:

  • that the debt has not been contested by the debtor and
  • in case the contract required a return service by the creditor, this service has been performed.

Choosing the Order for Payment Procedure makes sense where the creditor seeks a fast result without oral proceedings.

No evidential documents, such as invoices, contracts, or delivery notes, must be provided. Instead, the creditor, or their lawyer, submits a standard application form mentioning the name of the creditor and their legal representative, the type and amount of debt, the due date, the beginning date and rate of interest to be paid and any costs, including legal fees, incurred.

Each court region designates a district court with a respective responsible department for handling the Order for Payment Procedure.

The following steps are foreseen by law:

  • The district court will send the debtor a payment order (“Mahnbescheid”) by registered mail with the request to either pay or contest the creditor’s claim within two weeks from receipt of the order.
  • If the debtor does not pay and does not contest the order within that time limit, by sending the required completed form back to the Court, then the creditor is entitled to apply for an enforcement order (“Vollstreckungsbescheid”).
  • This enforcement order will be sent, again via registered mail, to the debtor. The debtor will again have the opportunity to contest the debt by filling in a respective form and sending it to Court within another two weeks from receipt of the enforcement order. At this stage, the debtor is not obliged to give reasons for contesting the debt.
  • If this time limit elapses without any reaction from the debtor, then the creditor holds an enforceable court order to freeze the debtor`s bank account or seize their property.
  • If the debtor contests the payment order or enforcement order in due time, then both parties are entitled to transfer the dispute to an ordinary court proceeding, where, of course, the creditor must support their claim with respective documentary evidence and/or witnesses.
Is it mandatory to send a warning letter before taking legal action to collect a debt?

There are two ways of taking action regarding warning letters for debts under German law:

  • If the creditor wants to put the debtor in default, they must send the debtor a warning notice after the due date for payment has passed. Article 286 of the German Civil Code also specifies that initiating court proceedings or the district court’s Order for Payment Procedure would also have the same effect as a warning notice.
  • According to the German Civil Code, no warning notice is needed if:
    • o a time limit for performance has been specified in the agreement, and this limit has lapsed.
    • o the set time limit is reasonable and practical for performance, given the contractual date of commencement of the activity.
    • o the debtor earnestly and definitively fails or refuses performance.
    • o after weighing the interests of both parties, the immediate declaration of default is justified for specified reasons.

Furthermore, the debtor is deemed to be in default if they fail to pay within thirty days following the due date and receipt of the invoice.

Though not mandatory, a warning letter sent by a lawyer is an advisable first step before initiating proceedings.

The lawyer`s warning letter should be short, and it should state the amount due, the reason for the debt, the time limit within which the debtor must pay, any interest accumulated to date, and the bank account details where the debtor should transfer the money. The debtor should also be warned that, should the time limit elapse without payment, the creditor will take further legal steps, creating additional costs and an increase in the amount due.

The Order for Payment Procedure (see Answer to Question 2. above) can be taken as a second step after the warning letter has been sent, or the initiation of court proceedings direct, as preferred.

How to proceed is something to be decided carefully, taking into account legal and Court costs, the timeline, the liquidity situation of the debtor, and realistic prospects of recovery.

What are the best practices for creditors to increase the possibility of recovering the debt?

It is advisable to document and archive all important elements of a business relationship from the outset.

Specifically:

  • Retain copies of all documents such as contracts, emails, hard-copy correspondence, written records of telephone conversations with the other party or third parties, contact details of witnesses (also former employees), delivery notes, etc.

  • Take care that the contract contains a clause that all amendments of the contract will be in writing and that this clause can also only be amended in writing.

  • In case of objections regarding failure to perform or defective or inadequate delivered goods, it is important to comply with German commercial law procedures and requirements for filing an immediate objection in order not to lose respective rights.

  • When starting a business relationship, it is advisable to ensure as far as possible, the contractual party’s liquidity, especially in relation to the value of the business venture in question. Obtain a current excerpt from the Company Register and a current credit-worthiness report for the respective company as applicable. A best practice is to require a bank guarantee from the contractual business partner.

  • Throughout the business relationship, be sure to keep a record of the counter-party’s assets and related documentation, including bank accounts, immovable property, movable property, and competent tax authority. These will be needed in case of enforcement of a future verdict.

Careful collection and retention of such records may also be useful in any future summary procedure for a claim arising out of a bill of exchange (“Wechselprozess”). This summary procedure gives the claimant/creditor, the opportunity to receive a fast track enforceable title. This involves a temporary restriction on the presentation of evidence as all facts constituting the claim have to be proved solely by documents.

The defendant/debtor can object to the claim giving specific reasons for this. If the objection is accepted, the dispute will be referred to the ordinary courts.

A decision from the summary process is provisionally enforceable without the claimant/creditor having to lodge security. Only if the defendant/ debtor provides a preliminary deposit, he can avert enforcement of the order.

How can a foreign creditor start a procedure for international debt collection in Germany?

Court proceedings:

In Germany, court proceedings for claims in excess of €5,000 are heard by the Landgericht (county court), where representation by a lawyer is obligatory. Court proceedings for claims of €5,000 or less are heard by the Amtsgericht (district court), where claimants and defendants may represent themselves if they wish.

Order for Payment Procedure:

Where claimants have recourse to an Order for Payment Procedure (see the Answer to Question 3 above for details), the use of a lawyer is not necessary. Claimants can complete the application form, which is also available online, and submit it themselves.

However, given the detailed requirements, the automatic nature of this procedure, and the need for the application to be written in German, it is advisable for foreign entities or individuals to have the help of a lawyer.

For powers of attorney, the same rules apply as for German nationals. For court cases, a power of attorney bearing the signature of the legal or natural person granting the power and, in the case of an entity, the company’s stamp as well, will be sufficient. The same applies to the legalization of warning letters sent by a lawyer (for details on warning letter procedures, see the Answer to Question 3 above).

Which documents are necessary for the debt collection in Germany?

In cases where a creditor first sends the debtor a warning letter or initiates the Order for Payment Procedure, no evidence needs to be presented.

If, however, the creditor chooses to initiate court proceedings against the debtor, then the creditor needs to provide evidential proof, e.g., of a written contract, services or goods provided, invoice(s) issued, delivery notes et al.

If the debtor, in their defense, cites the absence of a contract or order placed, non-receipt of goods or services, or damaged or faulty goods received, the creditor must present all evidence to support their claim.

Evidence admitted by the courts includes documents, witness testimony, on-the-spot inspections (physical and testimonial evidence), as well as statements given by parties or expert witnesses.

In debt collection cases, the German courts typically prefer documentary evidence over witness testimony. Careful and thorough filing of all documentation relevant to a business relationship is, therefore, essential for success in any eventual debt collection case.

Both the creditor and the opposing party may submit evidence to the Court at any point, from the filing of the case, up to the court hearing itself.

In this way, the creditor may issue the writ while stating that all evidence will be submitted in due course. This provides the creditor with valuable time to complete their discovery.

Claims not supported by adequate evidence will not succeed.

What happens after the first demand for payment?

Under German law, if the debtor settles the debt directly on receipt of a lawyer’s warning letter but was in default, and the creditor hired a lawyer to recover the debt, the debtor is also obliged to pay the lawyer’s fee.

If the debtor is willing to pay but does not have the required liquidity, it is advisable to move to conclude a written installment agreement, with specific payment dates that the debtor will have to follow.

The agreement should include provisions for direct enforcement against the debtor in case of non-compliance with the payment schedule, and it should be signed by both parties before a notary public.

In this way, the notarial act constitutes an enforceable order which can be used by the creditor for direct collection of the debt without recourse to a further lawsuit. In cases where the debtor refuses to pay after receiving the first demand of payment, the creditor may resort to an Order for Payment Procedure as an alternative to initiating court proceedings. Full details of this procedure are given in the Answer to Question 2 above.

Can interim measures be taken?

Interim measures can be taken under certain circumstances and according to strict prerequisites.

An interim measure of seizure (“Arrest”) is intended to help secure future enforcement of a monetary claim.

The right to seizure must be supported by a valid reason, namely, an evident risk to the claim.

For a seizure order against the debtor's assets (movable or immovable), there must be evidence of a real risk that enforcement will be considerably more difficult or face more obstacles without a seizure being imposed, e.g., concrete indications that the debtor will withdraw their assets from the creditor's and the Court’s access.

Worsening of the debtor's economic situation and competition from other creditors are not sufficient grounds alone for seizure, and neither are unlawful acts directed against the creditor/applicant’s assets unless such acts meet the criteria of proprietary criminal intention. Sufficient grounds for seizure are, however, recognized where judgment would have to be enforced in a foreign jurisdiction, not a party to specific E.U. or international conventions (Brussels I Regulation, the Brussels Convention and the Lugano Convention) guaranteeing reciprocal enforcement.

The claim and grounds for seizure must be supported by credible evidence (see the Answer to Question 5 above for examples of the same) and additional affidavits.

Execution of the seizure order requires the applicant/creditor to lodge a security deposit to cover the debtor’s risk should the claim or grounds for seizure not be (fully) proven.

In case the opponent/debtor objects to the issuance of the seizure order, they may lodge their own security, and the Court must then halt the seizure and decide the case under standard procedure.

Clearly, the use of seizure as an interim measure pending judgment needs to be made after thorough preparation, but it also must be made quickly to ensure the best prospect for interim relief and a successful final verdict.

If, for any reason, recovery was not possible, is there any other action that the creditor could take to write off such debt in its accountancy?

In Germany, the creditor must log the debt in their accounts as irrecoverable/uncollectible and provide proof of the same. Where the debtor is insolvent, this can easily be demonstrated with a copy of the respective court decision. Otherwise, the lawyer, entrusted with the collection of the debt, can confirm, in a respective written statement, that the debt was irrecoverable.