Expense of Bad Debt Recovery
It can be very costly when a lender makes bad loans. These loans eventually turn into bad debt accounts, and to collect cash from them a company has to utilize a variety of resources.
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Identification
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A bad debt account is an account in which a payment has not been made in 180 days. These accounts are turned over to collection agencies for further collection activity.
Fees/Expenses
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Some collection agencies will charge anywhere from 25 to 50 percent of the balance collected. If the account is forwarded to an attorney or legal action is needed there could be a cost to file a judgment in a court of law.
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Considerations
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The ideal situation is to forward the cost of collection on to the past due customer, but if the account cannot be collected the lender will have to bear the expense.
Loss/Income
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An account written off as a bad debt initially represents a loss, but any income collected represents cash or income, according to online financial resource Investopedia.
Collateral
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Sometimes bad debt is recovered by selling collateral. Depending on what the collateral physically is, there could be an expense involved in retrieving and reselling it.
Taxable Income
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Lenders will report the total amount of bad debts to the IRS, which reduces their taxable income for that period.
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