Bad debt recovery is simply a payment received for a recourse debt and regarded as uncollectible. Typically the receivable will come in the shape of a personal loan, a credit account, or any kind of merchant account receivable. As it often generates a very large loss when it’s written off, bad debt recovery often generates very high income.
Bad debt recovery can be difficult, even for accounting professionals, but if it’s done correctly there are many different ways to do it. Generally, bad debt recovery begins with the collection of your invoices. Most small business owners begin this process by first checking their accounting books to see what income they are receiving. You may find that your invoices show an excess amount of revenue, which can often be turned into cash to pay back some of your delinquent invoices.
Small businesses often begin their bad debt recovery process in much the same way as retail stores. Many times they have accounts receivables that they can write off because they are paid in full. To determine how much money has been recovered, the collection department must first look at the balance owed on each account, plus interest and administrative fees. Once they have assessed the amount of recovery possible, they’ll send you a letter giving you the amount of bad debt relief they are authorized to negotiate.
For very small amounts of bad debt recovery, your company may simply choose to make the payment received less than the total of all outstanding invoices. It may be enough to cover the cost of the collections agency, plus the cost of their discount and handling charge. Additionally, some companies have developed a system where they allow their customers to “stretch out” the payment received in order to get more time to repay it. The number of months required varies by each collection agency. If the balance due is very small, this option can provide uncollectible status for up to six months or longer.
For more difficult cases, a bad debt recovery agency may decide to work with the debtor to establish a repayment plan. For example, if the debtor owes more than ten thousand dollars and is behind in payments, but not necessarily in debt collectors’ possession, the company may decide to set up a partial payment plan. Depending on the circumstances, the company may decide to set up an installment plan with a fixed monthly payment that is equal to a percentage of the outstanding debt (10% is the most common method). This may come as a result of negotiation, settlement, a change in the debtor’s repayment timeline, or any combination of these methods.
Bad debts often don’t come to the attention of collection agencies in a normal fashion. Most consumers aren’t aware that they owe money until their account is shown as a pending collection. However, even when collections do come into play, it’s often too late to request additional allowances. For instances where the bad debt recovery agency already has a pending collection in place, the allowance request may have already been denied. If allowances are requested after the fact, it may be nearly impossible to obtain additional funds.
To apply for allowances through third-party companies, consumers must demonstrate a clear picture of their bad debts. While the collection agency can provide some vague information on the status of outstanding balances, consumers should provide hard numbers such as the amount owed, the current gross income of the debtor, and how the debt affects their overall income. Examples of bad debts that require a higher level of disclosure include business credit card balances and student loans. While bad debts don’t always require a specific monthly gross income amount, the amount of debt to income ratio is calculated by adding the outstanding balance to the consumer’s current gross monthly income.
Another factor to consider when pursuing bad debt recovery from a third-party company includes the amount of time the receivable is past due. Most third-party companies offer extended payment plans to allow customers to catch up on past due accounts. However, an extended payment plan may not always be feasible for customers who have been continuously past due for over six months. If an extended payment plan is not granted, the company may choose to pursue collection on an uncollectible account through the original lender, which could result in even more serious financial loss.