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  1. Glossary
0-9 A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Action (Collection)

If the debtor fails to pay creditor’s receivables, the latter has two options to legally assert the claim: He can either initiate default action or commence an action. Commencement of an action is necessary if the debtor denies the debt or raises any other objections. A default action will prove unsuccessful in that case – as it serves to quickly and economically lead to an enforceable legal document in the event of an indisputable case. 

However, if a debt is denied right from the start the collection enterprises are not permitted to process the case. According to the Legal Advice Act, collection businesses are only allowed out-of-court collection of (anticipated) uncontested debts. An action must be commenced directly by the creditor or his authorised legal representatives respectively.

The local court is competent for claims under 5,000 Euros, the regional court is competent for claims exceeding 5,000 Euros and subject to the statutory requirement to be represented by a lawyer.

Asset Backed Securities (ABS)

In the event of an asset backed-transaction, numerous, if possible, similar claims (debt pool) are sold to achieve quick liquidity. Sellers are made up of enterprises as well as banks that have sufficiently large debt portfolios at their disposal. Buyers are special-purpose enterprises that back the purchase price by issuing securities. ABS is the term for these securities or certificates of indebtness, their subject being the payment claims against the special-purpose enterprise. These claims for payment are backed by a stock of unevidenced claims (assets), which are assigned to the special-purpose enterprise and render the liability base for the owners of the asset-backed securities. Seller remains responsible for debt collection; buyer assumes default risk, usually without recourse.

Asset disclosure

An asset disclosure (formerly referred to as an affidavit) helps creditors to gain an overview of their debtor's actual assets. An application for submission of an asset disclosure is permitted with effect from 1 January 2013 as an initial enforcement measure. The asset disclosure is always submitted before a bailiff, sometimes in response to a summons.


Assignment pursuant to Section 398 Civil Code (transfer) allows creditor to assign debt in his favour to another person. A legally effective assignment presupposes a corresponding agreement between the assigning party (assignor) and the new creditor (assignee). This agreement can be made on a verbal and informal basis. The assignment does in principle not require any permission by the debtor, unless the debtor and creditor have agreed otherwise (e.g. nonassignability). Receivables suitable for assignment do not necessarily have to exist already. Future debt can also be assigned provided it is sufficiently identifiable at the time it arises.


Attachment is the state’s seizure of objects and rights (e.g. receivables due from the debtor) in order to satisfy the creditor’s monetary claims. All requirements for execution must be fulfilled before attachment can proceed.

  1. A request for seizure must have been made.
  2. An executory title with execution clause (enforceable proof of indebtedness) must be available and, if not already served to the debtor, must be served to him together with the request for seizure.

Execution may take place by way of seizure of the debtor’s goods or through attachment of a claim (e.g. attachment of account, attachment of earnings). In cases where debtors’ goods are seized, realization is carried out by the bailiff; in cases of garnishing, an order of attachment and transfer of garnished clause is required if the garnishee’s obligation to pay the creditor levying execution is to become valid, thus allowing its realization. Attachments with chronological priority rank before the ones following later. This means that the first creditor to attach is dealt with before the following creditors until his claim has been satisfied.

Seizure of goods

The seizure of goods refers to property or assets that are in the debtor’s custody. It is either documented by applying the bailiff’s seal or, in the case of money, valuables or securities, simply confiscated. The items seized are usually realized by means of public auctions.

Attachment of earnings (i.e. income from wages or salaries)

The debtor’s claim against his employer for payment of his wage or salary can be attached by the creditor. It is attached by requesting an order of attachment and transfer of garnished clause. The employer must submit a garnishee declaration, calculate the attachable part of the debtor’s wage or salary with the help of the remuneration table (annex to section 850 c, German Code of Civil Procedure [ZPO]) and pay it to the creditor. The attachment becomes effective when it is served to the employer. If the matter is urgent, a temporary garnishment order can be useful initially. If the earnings have already been attached, the attachment is still effective if the debtor enters into an employment relationship with the same employer up to nine months after the current employment relationship ends. This is important in the case of seasonal work, for example.

Attachment of account

Attachment of a debtor’s account follows an order of attachment and transfer of garnished clause applied for by a creditor to the competent court. The entity in charge of the debtor’s account (bank, savings bank) is claimed upon as the garnishee: the debtor’s claim to disbursement against his bank is attached. Many debtors handle their financial affairs via current accounts. The attachment of account is therefore seen as a successful form of attachment. If the debtor has insufficient funds available to cover the claim on his account, payments by instalment are usually agreed. The debtor is generally very much interested in bringing the state of attachment to a swift end. After all, in the event of attachment the SCHUFA (General Credit Protection Agency in Germany) will be notified accordingly, which may lead to a worsening of his credit rating. Moreover, the debtor’s bank has the right to terminate the business relationship.

Automated legal default action (AGMV)

Automated litigation default actions were introduced in 1982 with the objective of making the costly and irksome manual processing of default matters more efficient and economical: all applications are processed by computer, thereby eliminating the time-consuming filling-in of forms and multiple carbon copies. The quality of data processing was also improved: electronic plausibility checks reduce the error ratio. Processing time in court is also reduced, since applications submitted on data carriers can be processed on the day they are received.

Applications for automated litigation default action are submitted either in paper form on special printed forms that can be scanned or on electronic data carriers such as disks or magnetic tapes or cassettes. Coding and signatures also enable application via remote data transmission. Automated litigation default actions are now used at central dunning courts in all the German federal states. The only exception is Thuringia, where non-automatically (manually) readable applications are still processed at the court with jurisdiction over the applicant’s domicile.


Bailiffs are clerical-grade civil servants within the justice administration. Alongside the court of enforcement [Vollstreckungsgericht], they are the most important enforcement authorities. The tasks of the bailiff consist of seizure of personal property, accepting asset disclosures and effecting service of documents, e.g. court decisions and temporary freezing of payments.

Basle II

The new Basle II Agreement renovates the equity capital regulations for banks in order to make lending risks fairer in future. Main focus is the question of directives regarding the equity capital base of banks when lending to businesses. Hitherto, banks made blanket hedge deposits of 8 per cent of the loaned credit amount. Within the framework of Basle II, the equity capital base is now scaled according to the bank’s individual credit risks. In future, this percentage can vary between 1.6 and 12 per cent – depending on the financial soundness of the borrowing business. Its creditworthiness thus determines the credit terms: Businesses with worse creditworthiness pay more interest for their loan – in order to hedge against risk, the institute has to deposit a larger part of its own equity capital. Credit ratings carried out by independent rating firms or internal bank ratings are now (not before) particularly required for medium-sized enterprises . Hitherto, such ratings were only important for larger enterprises that issued company bonds on the securities market. The growing efficiency of competition on the financial markets - resulting from liberalisation and globalisation – changes the risk structures. Basle II takes this into account. However, owing to the new decisions within the framework of the Agreement, loans up to 1 million Euros can become cheaper for all companies because the banks are permitted to treat these loans in the same way as they do retail loans and thus, have to deposit less equity capital for them (instead of the hitherto 8 per cent, only 6 per cent of the credit volume). Moreover, small enterprises with an annual turnover of less than 50 million Euros can be categorised as less risky than their real rating is. For these companies the banks only have to retain equity capital of a similar size as previously so that the credit terms for those enterprises do not necessarily become more expensive. And for medium-sized enterprises with a balance sheet total or annual turnover of less than 500 million Euros the extra charge on long-term loans no longer exists in the future.


The term ‘cash flow’ refers to the amount of a company’s non-tied capital. As a financial variable it provides information about an enterprise’s liquidity position and specifies the amount of the financial surplus within a defined period. The cash flow shows the level of funds available to a company for investment, debt redemption and profit distribution on a specified date. Since it reflects the enterprise’s financial stability, the level of cash flow is an important factor in the assessment of its creditworthiness.

Claims management

The claims management of a firm manages trade debts. It covers every activity that can be connected to a claim, e.g. dunning activities, credit management and receivables management. Claims management has its origins in the Anglo-American business practice (credit & collect).


Subject to Section 421 Civil Code, co-debtors are defined as follows: Several debtors who are liable for a debt in a way that each of them is obliged to pay the total debt – while the creditor, however, may call in payment altogether only once. Creditor is entitled to call in debt at will, fully or in parts, from any of the debtors. Each of the debtors remains equally liable until the debt is fully paid. It is to the creditor’s advantage that he can always turn to the financially strongest of his debtors and that it is unnecessary to write off his claim even if debtors fail.


The German term ‘Inkasso’ (‘collection’) is derived from the Latin ‘incassare’ and means ‘to collect money’.

According to section 1, subsection 1, line 1, German Legal Advice Act (RberG), collection is the ‘out-of-court collection of external claims or claims assigned for collection carried out on a commercial basis’.

Collection authority

The collection enterprise is commissioned by way of proxy within the framework of the collection agreement to initiate all collection procedures necessary for the full payment of debt by the debtor. The collection enterprise is furthermore empowered within the collection agreement to carry out on behalf of the creditor all understandings and agreements etc. concerning the claim and to take receipt of monies with effect of satisfying the debt. Moreover, it can commission lawyers on behalf of the creditor to carry out legal and official proceedings arising from collection orders. They are entitled to undertake the informing correspondence with these lawyers and to delegate authority – e.g. for the receipt of money on behalf of the creditor.

Contractor (Collection)

Contractor is the collection enterprise that handles the collection of the outstanding debts for the creditor.

Credit standing

The credit standing of a business or consumer determines their credit worthiness. Creditors depend on the debtor being able to meet his debt servicing commitments (interest payments and redemption of borrowed funds). Credit standing measures the current and future capability to satisfy these commitments: Here, assets are just as important as the financial clout to be expected in future.


A creditor has claims against a debtor or several debtors who are defaulting in payment.

Customer (Collection)

Customer of a collection enterprise is the creditor who commissions the former by concluding a collection agreement to collect his outstanding debts.

Damage by default

Damages caused by default could be the costs of debt collection incurred after default took place as well as claimable interest on the debt amount itself. Costs are all payments incurred by creditor owing to legal pursuit: costs for investigation, dunning activities, travel expenses, telephone expenses, legal costs etc. The flat interest rate on arrears is 5 or 8 per cent above the current base interest rate of the European Central Bank.

Debt purchase

Within the framework of debt purchase the creditor sells his claims with all rights and responsibilities, for instance, to a collection enterprise. Contrary to factoring, debt purchase only applies to defaulting receivables (i.e. commercially non-demandable receivables) or already titled and nonsuable debts.

The original creditor benefits from debt purchase by saving administrative costs and capacities. He achieves immediate liquidity and no longer has the worry of collecting his outstanding receivables.


The debtor owes an obligation to the creditor. Co-debtors are several persons who are liable for the same obligation. Within the framework of debt enforcement, debtor is also the term for the party against whom the executory title is directed.


Default means basically negligent non-payment despite maturity. Default is generally brought about with a reminder after a monetary claim has become due. It is also possible to put a buyer automatically in default by indicating a deadline definable in the calendar. For instance: ‘Payable until...’. However, this has to be pointed out to the buyer in advance in a contract or in the General Terms and Conditions. According to the law on acceleration of due payments (Gesetz zur Beschleunigung fälliger Zahlungen [BGBI I]) it is also possible to place the debtor in default if an invoice reaches him after the due date. It is assumed here that the debtor can clearly establish from an invoice the amount to be paid.

Under section 286, subsection 3, line 1, German Civil Code (BGB), the debtor shall automatically be in default at the latest when he has not paid within 30 days of the debt becoming due and the invoice being received – without being sent a reminder. If the debtor is a consumer, this rule must be referred to explicitly on the invoice. Upon expiry of this period he is obliged to compensate for the damage caused by default.

Default actions

Out-of-court/Commercial default action

Out-of-court or commercial default action is carried out in writing, by telephone or through personal contact (see ‘Field service [collection]’). If the debtor is a private individual, at least one written reminder must be sent before litigation default action can be initiated. However, if it is indicated on the invoice that default in payment will commence 30 days after receipt of the due invoice, no reminder is necessary. Among business people, litigation default proceedings can be initiated with no additional reminder as soon as the legally stipulated payment term of 30 days has expired if the debt has not been paid.

Litigation default proceedings

Litigation default proceedings give the creditor the option of obtaining an executory title / writ of execution in the event of an uncontested claim (see ‘Titling’). However, this works only if the debtor has filed neither an objection nor a protest in the course of proceedings. Otherwise, the creditor has to file an action. If the debtor has filed neither an objection nor a protest within the set deadlines of a default action and the creditor has obtained a legal writ of execution (title), execution may proceed. Irrespective of this, the parties may come to a settlement at any time.

Defaulting debt

Defaulting debts are claims that are commercially non-demandable and not yet titled.

Earned income; displacement or concealment

By displacement or concealment of their real earned income, some debtors try to escape attachment of wages. Displacement is given if the employer, based on a corresponding agreement, pays the salary not directly to the debtor himself but to third parties (e.g. family members). If the creditor learns of this agreement, he can attach also the salary paid to the third party. However, in this case the third person must also be served with an attachment of earnings and transfer order. Concealment is given if the debtor works for a third party (often family members) in their company without remuneration or earning an unreasonable low salary. Here is the possibility to attach debtor’s ’alleged’ claim to the earned income. Because the employer in this case owes to the creditor the equivalent amount of a reasonable remuneration.


The term enforcement summarises all measures that can be undertaken by the enforcement organs (bailiff, court of enforcement) upon creditor’s application. In practice, attachment measures that allow creditor the immediate satisfaction of his claims are of particular relevance.

External relation (Collection)

This is the term for the legal relation between creditor and debtor. This term is used because collection law largely assumes legal relations between the creditor and the collection business – the so-called internal relation.


Factoring generally refers to the sale of trade receivables prior to their becoming due (directly after invoicing). The buyer is the factor.

The factor funds the customer in return for assignment. Any further functions he may assume for the company depend on the respective agreement: in case of full-service or non-recourse factoring the factor takes on bad debt losses (credit protection) and receivables management. Factoring without assumption of bad debt losses (without credit protection) is called ‘recourse factoring’. Should the customer insist on full credit protection while taking charge of the receivables management himself, the term ‘bulk’ or ‘in-house factoring’ is used.

Fiduciary collection

Fiduciary collection means handling uncontested debts on the basis of a contract with the creditor (client). The debt collection company becomes the new owner of the debt and sues for it under its own name. The assigning client, however, remains the commercial owner of the debt and the debt collection company remains obliged to him in their internal relationship. The client is entitled to the collection proceeds less a performance-related commission.


Forfeiting (also export factoring) is a form of financing where receivables that are due at a future date (from export business) are sold to a bank or a financial institution without recourse. ‘À forfait’, means that forfeiter assumes all commercial and political risks – without recourse claims against exporter. Seller is only liable for the claim having due validity.

Seller achieves through forfeiting the immediate disbursement of the granted payment term, thus improving his liquidity and unburdening his balance sheet. The claims are usually represented by bills of exchange. In leasing, forfeiting corresponds to nonrecourse Factoring.


Insolvency means inability to pay. The German Insolvency Regulation (InsO) defines the following as reasons for insolvency:

Section 17: Inability to pay

A debtor is regarded as unable to pay when he can no longer fulfil his payment obligations. This can be assumed as soon as he has ceased payment.

Section 18: Imminent inability to pay

This is already given when the debtor is unlikely to be in a position to meet his payment obligations punctually. There is considerable scope for discretion in this area, however.

Section 19: Overindebtedness

This applies to legal entities if their total assets are no longer sufficient to cover their existing liabilities.

Insolvency proceedings (consumer)

Consumer insolvency largely concerns private individuals but also affects small-scale traders or freelancers. The debtor is obliged, at first within the framework of an out-of-court debt settlement, to seek out-of-court settlement with creditors (instalments, respite, partial debt release, etc.). The support of a debt advice bureau or lawyer is recommended for this purpose. Should this prove unsuccessful, judicial debt reorganization proceedings commence. There are two steps to these. At first the court once again tries to achieve a settlement between the creditors and the debtor. In the event of failure, this is followed by the decision on whether to institute insolvency proceedings.

If the decision on whether to institute insolvency proceedings is positive, ‘simple insolvency proceedings’ take place. The court appoints a trustee to conduct the proceedings. After the insolvency proceedings have been concluded, there follows a period of good conduct, requested by the debtor, during which he has to assign his attachable income to the trustee for distribution to the creditors and fulfil other obligations. After this six-year ‘period of good conduct’ has expired, the debtor can be released from all residual debt.

First of all, the costs of proceedings must be paid before the quota is distributed to the creditors. The objective of consumer insolvency is to allow private debtors a debt-free new beginning. They should enter normal commercial life as soon as possible and support the national economy as consumers with money to spend.

Insolvency proceedings (in general)

Insolvency proceedings are initiated if a business or a private individual is unable to pay debts. The insolvency regulation determines when this applies. The objective of the proceedings is for the remaining (material) assets to be distributed in equal parts to all creditors, or for arrangements to be made to preserve the company, under the supervision of the court. If proceedings ensue, the court will appoint an insolvency administrator or a trustee.

Insolvency proceedings (regular)

Regular insolvency concerns commercial undertakings. If a business is threatened by insolvency, a timely effort to reach out-of-court settlement is appropriate. Creditors will waive some of their claims if a settlement is achieved. If out-of-court settlement fails, debtors or creditors can file for insolvency proceedings. The debtor can do so even prior to becoming finally insolvent to avoid full insolvency. An entrepreneur who fails to file for insolvency proceedings despite continuous inability to pay renders himself liable to prosecution. At first, the proceedings are instituted on a preliminary basis. An insolvency administrator appointed by the court examines the remaining corporate assets. The proceedings finally commence if there are sufficient assets to distribute.

Insolvency regulation (InsO)

The Insolvency Regulation has been in effect since 1 January 1999 and replaces the former regulations on bankruptcy.

It was reformed almost two years later (1 December 2001.) The InsO regulates company failures (see Regular insolvency proceedings) as well as insolvencies of private individuals (see Consumer insolvency proceedings).

International collection

If you service foreign customers you now and then suffer higher default risks. Information on financial soundness from abroad is not always reliable. According to German law, the costs of bringing an action must be borne by the customer. However, in case of doubt it is difficult to locate vanished debtors abroad. Moreover, the legal protection provided for creditors is only weakly formulated in many legal systems. This particularly applies to regulations concerning damage by default, retention of title and insolvency law. Internationally operating collection enterprises also take charge of debt collection abroad – they are aware of the particularities of foreign trade customs and laws.

Law of obligations modernising act

The reform of the law of obligations is one of the most extensive amendments of the Civil Code since it has existed, hence for more than 100 years. The requirement for amendment and improvement of the legal situation in wide parts of the obligations law, which were recognized long ago, was implemented by way of reform.

The need for amendment was seen in particular for the following areas:

  1. Law of defective performance: 
    Here ‘central elements of a rule’ have been created to sum up all defective performances, that is default, positive breach of an obligation and subsequent impossibility of performance, thus adjusting the previously very unclear picture of the Act.
  2. Integration of the consumer protection laws into the Civil Code: 
    In the course of time, an increasing number of supplementary statutes concerning the Civil Code have developed, which have now been systematically integrated into the Civil Code as central provisions.
  3. Law on contracts for work and services, and law on sales: 
    Far-reaching amendments in the law on warranty have occurred in this area that have led, e.g. to the extension of the warranty period from previously 6 months to 2 years at present.
  4. Law on limitation: the regular statutory limitation has been reduced from 30 to 3 years. 
    Important exception: it is still 30 years for debts established with binding legal effect. 

    At the same time, the commencement of limitation period has been tied to the arising of the claim as well as to knowing or ‘having to know’ the circumstances justifying the claim. If the requirements are fulfilled, the limitation period commences at the end of the year.

Leasing is the term for letting or leasing movable or immovable goods by a financing institution (leasing company) or by the manufacturer of the respective goods. Leasing is regarded as special form of financing. Possible classification points could be: duration and terminability of the leasing agreement (financial and operating leasing), position of the lessor (direct and indirect leasing) and type of leasing object (real estate, movables and manpower leasing).

Legal aid

Legal aid is the full or partial release from legal costs of a financially weak party, e.g. in the event of a legal default action.

Multi-seller-programme (ABS)

These programs bundle claims of several original creditors to achieve critical mass for ABS transaction. This gives firms with smaller debt stock access to ABS-financing.

Nonsuable debt

We talk about nonsuable debts if the creditor has obtained a title and fully exhausted the legal recourse, e.g. if the debtor is temporary insolvent.

Period of Good Conduct

The good conduct period is relevant in connection with consumer insolvencies: During the six years of the good conduct period (InsO 12/2002), debtor must pay the attachable portion of his earned income to a legally appointed trustee. Latter distributes the sums annually to creditors according to a previously fixed quota. In addition, debtor has to fulfil certain obligations (e.g. he has to be duly gainfully employed). If no reasons of failure occur and after the six years have expired, the court will upon application release debtor from the residual debts and by way of court order grant residual debt release.

Receivables management

Receivables management covers customer contact, written and by telephone, as well as the control of payments of receivables. These activities are therefore an important component of the overall claims management. The issuing of invoices and reminders, individual customer correspondence and customer calls are assigned to an outsourcing partner on a case-by-case basis.


With a reminder the creditor requests the debtor to satisfy an obligation after it has become overdue. Legally, it presents a unilateral request requiring communication that can be drawn up without specific form. However, it must be firm and unambiguous and has to express clearly that the payment of the owed debt is requested. It is recommended to send the reminder in writing and by registered mail since the creditor has to proof the receipt of the reminder if necessary.

Retention of collateral (Factoring)

The retention of collateral serves the factor to compensate rebates, discounts or possible defence based on warranty for defects by the debtor. It amounts to between 10 and 20 per cent of the purchased debt and is offset or paid when due.

Scoring / scoring systems

Scorings are forecasts of customer behaviour and are prepared with the help of mathematical-statistical analysing methods. The risk potential of the customer is usually and continuously evaluated in this way during the whole life of the business relationship. The processed information is taken from electronic payment systems as well as socio-demographic data like age, family status and residential situation. Scoring is used as control strategy mainly by enterprises operating in bulk business: Mail order houses, telecommunication firms, banks, building societies etc. increase the profitability of their customer relations in this way.


A settlement is an agreement in which the dispute or uncertainty of the parties over a legal relationship is removed by way of compromise. A distinction is made between out-of-court settlements, which can be concluded as normal legal transactions without a lawyer, and settlements in court. The latter is simultaneously an executory title that can be used for debt enforcement. Courts are required at all stages of the proceedings to work towards an amicable settlement – this is why settlement proposals are often made in court. No debt enforcement can be carried out on the basis of an out-of-court settlement – in order to obtain a corresponding executory title, the creditor has to sue for specific performance.

Statutory limitation

Under Section 194 BGB, the right to request somebody to do or refrain from doing something is subject to statutory limitation. Upon expiry of the statutory limitation period, the debtor is entitled to refuse payment (section 214, subsection 1 BGB). This means that while statutory limitation does not eliminate the claim, it does prevent its enforcement against the debtor’s will if he pleads the statute of limitations.

The statute of limitations was reformed as of 1 January 2002: the regular limitation was reduced from 30 to 3 years. At the same time, the commencement of the limitation period has been tied to the due date of the claim and to knowing or ‘having to know’ the circumstances justifying the claim. If these requirements are fulfilled, the limitation period commences at the end of the year. Under sections 203 – 213 BGB, statutory limitation can be suspended. This occurs, for example, by way of negotiations, commencement of an action, service of a payment order, application for conciliation or respite. The limitation period is lengthened by the period of its suspension.

Under section 212 BGB, moreover, the statutory limitation can start anew, for example as a result of debt acknowledgment, partial payment, or judicial or official execution measures.


Only a legally titled claim achieves formal res judicata – it confirms the creditor’s claim against the debtor. A titled claim does not become statute-barred until 30 years have passed. The titling of a claim is obtained through default action or proceedings. Titling, moreover, is the precondition for debt enforcement: the serving of an executory title (e.g. writ of execution, judgement) to the debtor must be proven.

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