Czech top court caps lucrative debt collecting business

The Czech Constitutional Court has delivered a breakthrough verdict which aims to put an end to a much-criticized yet lucrative business that in recent years has plagued the Czech Republic. The verdict dramatically lowers the ceiling on the costs law firms can charge for collecting small debts. That means they will no longer will able to inflate their fees which often far exceeded the original debts.

Illustrative photo: Barbora Němcová

There are many people in the Czech Republic who lost money, property and even their homes due to small debts they made in the past and committed the grave error of forgetting about it.

For example, the daily Lidové noviny reported the story of a man, Jiří Vlasák, who in the year 2000 was caught riding a Prague tram without a ticket. Nine years later, his employer received a court order to freeze Mr Vlasák’s salary until he paid 45,000 crowns. Nearly all of that sum represented legal fees charged by the firm that the city transport company hired to retrieve the debt.

Collecting such small debts has become a lucrative business over the years. In 2011, nearly one million property seizures were ordered by Czech courts, a third of which was related to debts smaller than 100 crowns.

Daniel Hůle

Some of the people affected took their cases to court, and some of them were successful. Earlier this year, the Czech Justice Ministry also lowered the fees that can be charged by repossession firms. But only now has the Czech Constitutional Court moved to end the often abused practice when it ruled that in case of small debts, the firms’ legal fees and costs must not exceed the original sum. Daniel Hůle from the Czech NGO People in Need.

“The ruling radically lowers the fees and also changes the way they are calculated. In the past decades, yesterday’s ruling is single most positive change in the area of insolvency.”

But the ruling’s significance might be greater than that. Many public companies, typically city transportation providers, sold their claims to legal firms with non-transparent owners. Last year, legal costs and fees related to collecting small debts across the country reached an estimated 20 billion crowns. Mr Hůle says that severing these money flows could help clear some of the murky waters of corruption.

Photo: Jason Morrison / Stock.XCHNG

“A narrow interest group has had a strong motivation to keep the system the way it was. When we compared the Czech system with those that are in place in other EU countries, we found out that everywhere else, the costs were much lower than here. Until now, these people each year had several billion crowns at their disposal to lobby among Czech politicians to keep the status quo.”

The Czech Bar Association says it will wait for the complete verdict to be released in writing before they take a standpoint. Meanwhile, Daniel Hůle from the NGO People in Need expects that thanks to the Constitutional Court ruling, the number of individual property seizures could this year drop by as much as half.