Payment plans — structured arrangements for a debtor to repay a debt in instalments over time — are a core tool of commercial debt recovery. When structured well, they provide a realistic path to full recovery while giving the debtor the flexibility their cash flow requires. When structured poorly, they delay the recovery process, provide false comfort to the creditor, and ultimately result in a worse outcome than earlier escalation would have produced.
Assessing whether a plan is appropriate
Before agreeing to any instalment arrangement, consider whether the debtor's situation supports the conclusion that they can and will adhere to a plan. Ask: What has changed since the debt fell due? If the debtor has been unable to pay for 90 days, what will be different in the next 90 days? A debtor who cannot identify a specific answer to that question — a deferred invoice coming in, a contract being finalised, a seasonal pattern resolving — is likely proposing a plan that will fail.
Structuring the plan
Effective payment plans have these characteristics:
- A meaningful initial payment: a payment at the time of signing the arrangement demonstrates the debtor's ability and commitment. An arrangement that commences with a first payment in 30 days has no such demonstration.
- Instalments proportionate to the balance: a plan that repays $10,000 at $100 per month for over eight years is not a payment plan — it is a debt parking arrangement. Instalments should repay the balance within a reasonable period, typically 6 to 12 months for commercial debts.
- A defined default clause: the arrangement should specify that if any instalment is missed, the full outstanding balance becomes immediately due and the creditor may take enforcement action without further notice. This is important for maintaining leverage.
- Written form: every payment arrangement should be in writing, signed by the debtor (and by any guarantor whose liability you want to preserve). A verbal arrangement is unenforceable in a practical sense.
- Interest and costs: if your terms permit interest on overdue amounts, the arrangement should specify whether interest continues to accrue during the plan and at what rate. If the arrangement stops interest, document that clearly to avoid later dispute.
Direct debit preferred
Where the debtor agrees, direct debit mandates dramatically improve plan completion rates compared to self-managed payments. The debtor does not need to actively remember to pay each instalment, and the creditor receives the payment automatically. This should be offered (and preferred) over EFT self-payment wherever possible.
What to do when a plan fails
When an instalment is missed, do not wait to see if the next one arrives. Contact the debtor on the day of the missed payment. If the explanation does not include a firm revised date, invoke the default clause and escalate. A plan that has failed is a clear signal that the debtor's circumstances have not stabilised — further plans are unlikely to succeed.
Refer the account to Merion when internal plan negotiations have not produced a sustainable arrangement.