There are a number of ways in which businesses in Germany can collect outstanding debts and shore up their liquidity. Besides suing or employing factoring, they can also initiate judicial dunning proceedings. This article will tell you what judicial dunning proceedings are, when they make sense, and how they work. We’ll also explain what rights debtors have and what risks there are for businesses that initiate judicial dunning proceedings.

What’s in this article?

• What is the judicial dunning procedure?
  
• How the judicial dunning procedure works
  
• Debtor rights and deadlines
  
• Use cases and risks
  

What is the judicial dunning procedure?

The judicial dunning procedure is a legally regulated court process for enforcing outstanding monetary claims. Businesses in Germany use it to collect outstanding payments from customers and business partners quickly and affordably. Creditors can obtain a payment order that urges the debtor to pay without having to go through the costly and time-consuming process of suing. If the debtor fails to respond, then the next step is for the creditor to apply for an enforcement order, which provides a basis for compulsory enforcement.

The judicial dunning procedure is largely automated, with no oral proceedings or taking of evidence. Occasionally, the court will check the formal correctness of the application, but not the validity of the claim. There is also no need for legal counsel in the dunning procedure. This makes the procedure an efficient way for creditors to enforce their claims without expensive legal costs and court fees.

Another advantage of the court dunning procedure is that it prevents a claim from lapsing. As soon as an application for a payment order is filed and served on the debtor, the limitation period under Section 204.1.3 BGB (German Civil Code) is suspended. Court dunning proceedings are therefore a particularly good option if a claim is about to lapse and there is not enough time left to sue. These advantages make court dunning proceedings particularly attractive for small and medium-sized enterprises looking for an efficient way to avoid liquidity shortages.

Judicial dunning procedure vs. standard dunning

The judicial dunning procedure differs significantly from standard dunning. Standard dunning (i.e., a written payment demand) is usually the first step a company takes when a debt is outstanding. Its primary purpose is to remind the debtor of their outstanding payment. While it does constitute a formal order to pay, it is not a court order and so does not have any direct legal implications.

So as not to put unnecessary pressure on your client relationship, it’s a good idea to react to an outstanding payment using standard dunning first. You should only think about initiating legal dunning proceedings if the debtor fails to react to multiple payment reminders.

Stripe Billing can help you with not only recurring invoicing and billing for usage-based models and tailored contracts, it can also automate your dunning processes and send out payment reminders at intervals you define. Plus, with Smart Retries, you can deploy an intelligent algorithm that retries the payment at a time when it’s likelier to succeed.

How the judicial dunning procedure works

Below, you can see how typical judicial dunning proceedings work. The specific process depends enormously on how the debtor responds to the payment order.

Prepare your application

The first step in court dunning proceedings is to apply for a payment order. The payment order is an official document that instructs the debtor to pay. You can file for a payment order from the competent court either online or in writing.

• Written application: You’ll need an official form, which is available at stationary stores or office supply stores. You can usually purchase the form individually or in packs of 5 or 10 for a few euros. Debt collection agencies and attorneys cannot use written forms; they must file online.

• Online application: You can file for a payment order online via the website of the dunning courts. The system will walk you through the form step by step. Once you have filled in the form, print it out, sign it, and send it to the relevant court.

What to include in your application

When applying for a payment order, you should start by providing your company name, address, and your contact details as the claimant. You must also provide information on the debtor. Make sure any names you give are correct and complete. Company names should be cross-referenced with the German Commercial Register or the register of companies in the relevant town, city, or municipality. Errors in debtor information can delay the process or, in the worst case, render your application null and void.

You also have to state the exact amount of the claim. This includes the amount due, plus any interest that has accrued and any ancillary claims you might have. Finally, state the due date of the claim—i.e., the date on which the payment was originally due or the claim arose.

Submit the application

Send your application form to the relevant court. Evidence, such as additional documentation, is only required if court proceedings are initiated. As a rule, the central dunning court in your federal state has jurisdiction over your application. The only exception is employment-related claims, which fall under the jurisdiction of the labor courts.

Service of the payment order

Once the court has reviewed your application, it will issue a payment order, which it mails to the debtor. As the claimant, you will be simultaneously notified by the court that the payment order has been served.

Possible responses to the payment order

Once the payment order has been served, the debtor can either settle the claim or file an appeal. If they fail to do either, the court can issue an enforcement order. In order to obtain one of these, you as the creditor must file a corresponding application within six months. You can use an enforcement order to initiate compulsory enforcement and then hand over the matter to a court-appointed enforcement officer. This officer has the power to take a variety of enforcement measures in order to collect on your claim. These measures can include seizing accounts, garnishing wages, or designating attachments on other assets of the debtor. Subject to the statutory prerequisites—such as having a search warrant signed by a judge—the court-appointed enforcement officer may enter the debtor’s home in order to seize assets that can be used to settle their debt.

If the debtor cannot be reached or if they have changed their place of residence, the enforcement order can be served publicly. For example, it can be published on an online court information system or posted in the courthouse itself.

Debtor rights and deadlines

If, following service of the payment order, the debtor settles their debt, the procedure is concluded. However, they also have the option to file an appeal within two weeks. To do this, they must give the court notice of which part of the claim they’re appealing. If they file an appeal before the two-week deadline passes, then the payment order will be suspended. The proceedings then pass to the competent court and the dunning procedure becomes a lawsuit. The creditor must substantiate their claim and pursue their demand through court proceedings.

In addition to a right of appeal, debtors also have the option of settling their debt in installments or agreeing on a deferral. To do this, they must demonstrate that they cannot currently pay the full amount owed. However, these options must be arranged directly with the creditor or their representatives.

Debtors can take action against an enforcement order by filing an action to oppose enforcement If this action is successful, the compulsory enforcement is limited or terminated, and the enforcement order is overturned. Typical grounds for an action like this include, for example, that a claim has already been settled or forgiven. An approved deferral or an offset against counterclaims by the debtor can also provide grounds for this kind of action.

Use cases and risks

The judicial dunning procedure is used in particular by small and medium-sized enterprises in Germany that find themselves faced with late payments. These might be outstanding bills from customers or business partners who have not paid for a product or service despite repeated reminders. The dunning procedure can also be used to collect recurring payments, such as rent receivables. The amounts involved are usually negligible. While large sums may justify legal action and the associated costs, smaller amounts can be recovered with minimal effort through a dunning procedure.

The judicial dunning procedure has a particularly high success rate when the claims are uncontestable and the debtor has no legitimate defense against payment. This is the case, for example, with purchase contracts where a fixed price and clear payment terms have been agreed upon.

Risks involved in the judicial dunning procedure

Despite its advantages, the judicial dunning procedure also comes with risks that companies should bear in mind. These include the costs of the dunning proceedings themselves. Although these proceedings are generally less costly than suing, they can still incur court and legal fees, plus costs for any compulsory enforcement. Plus, in the event of an appeal, the dunning procedure could become a lawsuit, which creates further costs. If the debtors are insolvent, the dunning procedure will not result in payment. When this happens, the business bears the costs of the court dunning procedure with no reimbursement.

The potential reputational risks should not be underestimated either. Companies that repeatedly initiate legal dunning proceedings or order compulsory enforcement measures against customers or partners risk harming their business relationships. You should first think about alternative solutions, especially when dealing with long-standing customers or partners. In such cases, installments plans or individual agreements should be given preference over dunning procedures.