Writing Off Bad Debt

Tristan Andrews asked:


Recovering bad debts can be an arduous task, particularly in days of economic downturn and recession when the frequency of bad debts rise. But before a bad debt can be reclaimed, it has to be identified in time before things become worse. This is the first step in salvaging a bad debt. The next step is to collect the debt. We discuss these two steps in this article in more detail.

Identifying a bad debt early improves the chances of reclaiming it. The creditor has to look for indications in customer’s conduct that point to impending default. The following are some of those indicators.

- The customer frequently breaks the terms of repayment like late payment, postponement, etc. offering frivolous excuses

- The contact person is unavailable whenever a call is made for debt collection

- Unrealistic complaints are made by the customer with regularity regarding the quality of product or service or both whenever asked for payment

- The debtor fails to answer reminders through phone calls and / or in writing. Also the debtor changes the contact telephone no. and / or address without leaving forwarding information

Gathering information about the customers through sources like suppliers, other customers, financial papers etc. would help in identifying customers who are not financially sound and early recovery of debts. Bad debts can be minimized by regular exchange of customer information between sales and finance departments

The next step after noticing a bad debt is to act on reclaiming it. It is better to try to recover it oneself without seeking outside help first. This would help in keeping the communication channels open and in retaining the client. In all these attempts, proper records should be kept so that it can be shown as proof if it goes to dispute resolution stage. Previous experience in handling bad debts and awareness of the provisions of Fair Debt Collection Practices Act (FDCPA) would help in quick recovery at least in a few cases.

If all the in house attempts fail to recover a debt, then it is time to contact the collection agencies. These agencies have experience in handling delinquent cases and the necessary facilities to take follow up action with the debtor. But it must be ensured that even the collection agencies follow the FDCPA scrupulously as otherwise they can land you in legal trouble. In all cases the necessary information should be passed on to the agencies so that they can judge each case and take appropriate action.



Writing Off Bad Debt

Tristan Andrews asked:


When all in house efforts fail to recover a debt, they are handed over to a debt recovery agent or collection agent. This article discusses how the latter functions and recovers bad debts.

Debt recovery agents usually contact the defaulting individual or company through letters initially followed by phone calls. They may use automated telephone systems that keep track of the calls or computers with software that periodically dispatches reminders to the debtor. If the debt is small, phone calls may be too expensive and only letters may be sent. If all the normal mode of debt collection fails to yield any result, the collection agency may resort to legal recourse and approach a court to settle the dispute.

Debt recovery agents have reputation of using intimidation and harassment to recover bad debts in the past. But with the passing of Fair Debt Collection Practices Act in the U.S., debt recovery is done in a more humane manner. This act prescribes that the debtors must be treated in a fair way and that they should not be threatened or bullied. Also debt recovery agents have realized that it is better to work with the debtors and discuss means of repaying the loan with payment plans and other options which has greater chances of success than coercion.

When all means of persuasion have failed, debt recovery agents can be approached for debts that are overdue by at least a month. The pros and cons of handing over the case have to be thoroughly analyzed depending on each individual case. But once it has been determined that there is no way out, the bad account should be handed over to debt recovery agent at the earliest as the chances of recovery is more when the overdue period is less. Once handed over, the debt recovery agent handles all the correspondence and details of settlement of the account. Some pointers to a debt going bad and when it is time to hand it over to a debt recovery agent are listed below:

- The payment terms are not adhered to by the customer like frequent postponement or delayed payment on frivolous grounds

- The customer fails to answer reminders through phone calls and / or in writing or secretly changes the contact telephone no and/or address

- The customer denies owing any money in spite of written records

- Baseless complaints are made by the customer repeatedly regarding the quality of product or service whenever asked for payment



Writing Off Bad Debt

Tristan Andrews asked:


One of the reasons why a debt goes beyond recovery stage is failure on the part of the creditor to contact the debtor periodically and demand repayment of the debt. It may be due to failure to communicate or improper communication. This article gives some tips on how to write good debt recovery letters.

The first notice to a debtor regarding an overdue debt should not appear to be a debt recovery letter. It should be written in a friendly fashion, just a gentle reminder, without offending the reader. It is possible that the debtor had failed to keep up the commitment due to sheer oversight after all. If no reply is received for the first letter, the second should follow a week later mentioning the details of the overdue amount and requesting payment. You may gently ask if the client is facing any problem for making the payment.

The third letter in the third week should be more persuasive and it should quote any written agreement like an invoice and explain how the delay in payment is affecting your business and your cash flow. If no reply is received even after the lapse of a week, the fourth reminder should state plainly that it would be the last letter with a deadline of a week before the matter is handed over to recovery agents. You may attach a copy of the invoice or any other written proof.

Finally after the lapse of 4 weeks, if there is no response, you may refer the matter to a debt recovery agent after ensuring that the contact address of the debtor is correct. Letters should preferably be followed by telephone calls directly to the person concerned, if possible. You may also take the help of outside agencies for writing debt recovery letters if you don’t have the time to do it.

You should not fail to contact the debtor on the first instance of the debt falling overdue. More the elapse of time, lesser is the chance of recovering the debt. The reminders should be sent once a week. Email reminders are not treated in the same way as those sent on paper by some people. Emails may fail to get noticed if there are too many of them, occasionally they may fail to reach the addressee. Hence if there is no response to repeated email reminders, they should be followed by paper reminders. Digitally signed emails have better legal sanctity then ones without signature and they can be retained as evidence in case of dispute later.



writing off bad debt