top of page

Verbal Contracts: Their Application, Benefits, and Limitations with Debt Collections

Updated: Nov 17, 2023


A handshake between a man and a woman happening across a desk with a laptop.

Contracts are typically associated with written agreements that outline repayment terms. However, it's essential to recognize that verbal contracts can also arise in this context. While verbal agreements have their advantages, in terms of debt collection, they pose unique challenges. Below we explore what verbal contracts mean, why they are sometimes utilized, and the pros and cons associated with their consideration.



Understanding Verbal Contracts

A verbal contract refers to an oral agreement made between two parties without written documentation. It stipulates the terms and conditions of the business transaction, clearly establishing the rights and obligations of both parties. While verbal contracts may not be as comprehensive or enforceable as written agreements, they can still carry legal weight under specific circumstances.



The Elements of a Verbal Contract Generally Include

Offer: One party must make a clear and specific proposal to another party. This offer should outline the terms and conditions under which the agreement is being made.

  • Acceptance: The other party must express their agreement to the offer. Acceptance can be oral, written, or implied through actions (e.g. a handshake), as long as it is communicated to the offering party.

  • Consideration: There must be something of value exchanged between the parties. This can be money, goods, services, or any other form of consideration that supports the agreement.

  • Intention to Create Legal Relations: The parties must have the intention to enter into a legally binding agreement. This means they must understand that their words and actions signify a commitment and that the agreement carries legal consequences.

  • Capacity: Both parties must have the legal capacity to enter into a contract. This means they must be of legal age, mentally competent, and not under the influence of any incapacitating factors such as duress or coercion.

  • Mutual Agreement: There must be a meeting of the minds between the parties, indicating their shared understanding and agreement on the terms and conditions of the contract.


Why People Use Verbal Contracts

  • Informality and Flexibility: Parties may opt for verbal contracts to promote a more relaxed and accommodating atmosphere. This approach can facilitate open communication and encourage flexible negotiations, potentially preserving the goodwill and willingness to cooperate of each party.

  • Rapid Resolution: Verbal contracts provide a speedy alternative when time is of the essence. Businesses facing financial constraints or other obligations may prefer to establish a verbal agreement promptly to avoid lengthy delays associated with drafting and reviewing formal written contracts.

  • Less Intimidating: Some parties may find written contracts intimidating or burdensome, potentially deterring them from engaging in the negotiation process. Verbal contracts can offer accessibility and simplicity, making business discussions more approachable and less overwhelming.


The Benefits of Verbal Contracts

  • Flexibility in Negotiation: Verbal contracts allow for more fluid and adaptive negotiation processes. Businesses can discuss and modify repayment terms in real-time, accommodating changes in the party's financial situation or unforeseen circumstances.

  • Preserving Customer Relationships: Business interactions often occur between parties who have had prior business relationships. Utilizing a verbal contract can help sustain a sense of trust and mutual understanding.

  • Cost and Time Efficiency: Verbal contracts save resources by circumventing the time and expenses associated with formal written agreements. Streamlining negotiations and reducing administrative tasks can be particularly advantageous for businesses.


The Limitations and Risks of Verbal Contracts

  • Ambiguity and Misunderstandings: Verbal contracts lack the clarity of written agreements, increasing the risk of misinterpretation or misunderstandings. This can lead to disputes regarding the exact terms of payment, potentially causing delays in payment recovery.

  • Difficulty of Enforcement: Without written documentation, proving the terms of a verbal contract can be challenging in legal proceedings. Memories fade, and conflicting recollections can undermine the party's ability to seek legal remedies or enforce the agreed-upon repayment terms.

  • Risk of Noncompliance: Verbal contracts face a higher risk of noncompliance due to the lack of formalities and accountability associated with written agreements. Businesses may deny or forget their obligations, rendering it difficult for creditors to monitor and enforce the repayment process effectively.



Conclusion

While verbal contracts can offer advantages, they also present inherent limitations and risks. Whenever feasible, it is advisable to seek written consent or secure supplementary documentation to enhance the clarity and enforceability of repayment terms in debt collection efforts.


 

About EverWorth


EverWorth is a debt collections company on a mission to help people feel financial relief by offering dignified and diplomatic debt collection services designed to help companies preserve their reputation and relationships. EverWorth currently offers commercial debt collection and business transformation consulting services for companies in 27 states. EverWorth is focused on growing our team, our partner network, and evaluating acquisition opportunities for consumer and commercial debt agencies across the country. We are 100% female-owned and based in Brooklyn, New York.

bottom of page