Investment and commercial law The role of settlement in the debt collection process—is it always worth negotiating?

What does the settlement involve?

An out-of-court settlement is a voluntary agreement in which the parties specify the terms of debt repayment—this may include: spreading payments into installments, partial debt forgiveness, setting a new payment date, or a combination of these solutions. Most often, an out-of-court settlement agreement is concluded in writing, which protects the interests of both parties.

• Savings in time and costs of court/enforcement proceedings

Amicable debt collection, concluded with a settlement with the debtor, allows you to avoid court costs, bailiff enforcement fees, and months of litigation.

• Flexible solutions and faster claim settlement

The parties have the option of individually determining the terms of repayment—the schedule, installment amounts, interest, or partial debt forgiveness. A settlement increases the likelihood of recovering the debt and voluntary repayment by the debtor.

• Restoring business relations

An amicable settlement helps maintain good business relations and the image of both parties.

• Interruption of the limitation period

Conclusion of a settlement agreement (when it results in acknowledgment of the debt by the debtor) interrupts the limitation period for the claim. From the date of conclusion of the settlement agreement, the limitation period starts running again.

When is a settlement not a good solution?

An out-of-court settlement is not always possible or advantageous. The main risks and disadvantages are:

• Lack of willingness to cooperate on the part of the debtor, avoidance of contact, or persistent evasion of payment.

• Risk of the claim becoming time-barred due to excessively long negotiations.

• Concluding a settlement on unfavorable terms, resulting, for example, in the cancellation of too large a portion of the debt.

Practical tips for preparing a settlement agreement

1. Precisely define the parties to the settlement

Provide accurate details of the parties (first names, last names, company names, PESEL, KRS, addresses).

2. Specify the details of the obligation

The settlement should clearly specify what it relates to (e.g., which invoice or other financial document), the amount remaining to be paid, and the date on which the obligation arose.

3. Set up a debt repayment schedule

The agreement should include a specific repayment plan – installment amounts, payment dates, and the account number to which payments should be made.

4. Agree on additional terms and conditions

The parties may agree, for example, on partial debt forgiveness, interest, deferral of payment, or reduction/addition of specific contractual penalties.

5. Add provisions regarding the debtor's failure to comply with the settlement

It is important that the settlement includes a provision specifying what will happen if the debtor fails to comply with the agreed terms (e.g., the possibility of immediately pursuing the entire claim, charging interest).

6. Consider concluding the settlement in writing or before a notary public

For safety reasons, it is advisable to conclude the settlement in writing. In special cases (e.g., involving larger amounts), in order to increase the effectiveness of enforcement, you may consider, for example, a notarial deed together with a statement by the debtor on voluntary submission to enforcement (Article 777 of the Code of Civil Procedure), which shortens the debt collection process in the event of non-performance of the settlement, because after obtaining an enforcement clause, you can immediately go to the bailiff with it.

7. Attach the necessary documentation

It is advisable to attach documents that prove the existence of the obligation (e.g., the main contract, invoices) to the settlement agreement.

8. Ensure that the signatures are correct

The settlement agreement should be signed by all authorized persons (by hand or with qualified electronic signatures), and then each party should receive their own signed copy of the document.

9. Seek professional help

Consider consulting a legal advisor when preparing a settlement agreement to ensure that your interests are protected and to avoid any potential legal pitfalls.