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How to Avoid Writing Off Bad Business Debts

Bad debt is credit, owed by a debtor that is likely to be unpaid. It can be due to a debtor going bankrupt, or their business going into liquidation. Since the debt cannot be recovered, it is meaningless to put it in the books of account. Sometimes, pursuing the debt may prove to be costlier than the debt itself. If this happens, you write it off as a business expense.

Bad debts are the worry of many businesses. In the business world, customers always request to pay for services by direct debit or standing order. 

 

1

Send a Formal letter of Demand

Once the payment is overdue, contact the customer. You can call, mail or email them as a reminder. Sometimes, the customer might have forgotten, or had a minor issue with the payment plan. With the mail or email, attach the payment options, banking details and contact information.

Give the debtor 5 working days to respond to the letter either by:

  • Paying the full amount.
  • Requesting for a payment arrangement, and pay part of the debt.

Discussing any issues of the product or service that might have led to payment forfeiture.

2

Debtor Contact

According to the ACCC/ASIC Debt Collection Guidelines, there are restrictions on when and who a collector can implement the following procedures.

Contacts can only be established by; call, mail, email and SMS. There should be no more than 10 contacts a month. Furthermore, calls can only be made during working hours, between 7.30 and 9.00 am, and after 5.00 pm. Only three calls can be made to the debtor in a month.

3

Negotiation

Clients are required to provide documents and information when required by the customer. Failure to do so, can be deemed as misleading and deceptive conduct.

Collectors can

  • Negotiate with debtors in regards to debt repayment.
  • Negotiate payment arrangements and debt arrangements,
  • Discuss disputes between the debtor and client and come up with a resolution
  • Research and obtain evidence of misconduct by either party

Effect a resolution that lead to the debt being finalized.

4

Location of Debtors’ location

Sometimes, a debtor decides to leave town or go away to avoid paying the debt. This can be confirmed if the letter of demand is returned and there is no forwarding address and the phones are disconnected.

The collector will use databases and searching systems to locate the debtor.  Any information on business names, aliases, property ownership, partnerships and bankruptcy will be looked into.

5

Personal Call

This involves the collector visiting the nominated address of the debtor, and handing them a letter of Intention to Summon. They are advised to complete the payment on behalf of the debtor, and further, provided with the payment channels and the amount due.

6

Legal action

If all these channels have proven to be unsuccessful, then the collector can advise the creditor to take legal action. Even though legal action is complex, the collector will advise the creditor on the best action to take, to ensure that they recover the debt.

Further information

In conclusion, always be wary of whom you conduct business with. You can never be sure. Even a customer with a perfect credit score can always default on their repayment. All in all, only use legal channels when all other methods have failed.

You can also minimise risks by:

  • extending credit to the right customers using credit limits
  • having clear terms and conditions
  • making sure that you check who is in charge before drawing up an invoice
  • monitoring your customer's finances
  • sending regular reminders to customers
  • providing different types of repayment options
  • reconsidering repayment terms
  • staying in contact
  • having a strategy.

Strategy

In case customers default on payments, then you must have a strategy to reclaim that debt. As a short-term measure, you can put their credit account on hold. You can also negotiate partial payments, or have an arbitration method in order to ensure that you recover the debt without going to court.

After all these strategies have been put in place, you still find yourself giving out debts, that turn out to be unrecoverable. How then, do you go about recovering a bad debt? Which measures do you put in place to ensure that the business does not suffer unnecessary losses?

First of all, there must be a proven business relationship between the company and the client. Custom written contracts, invoices and receipts are proof of the business relationship. Correspondence and payment reminders will be enough proof that the client has neglected its mandate of repaying the business.

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Page last edited May 24, 2017 History

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