How to Recover Bad Debts
Bad debts are accounts that a business has reported as a loss to the Internal Revenue Service (IRS) because they have been unable to collect the balance. This process is done for accounting purposes. The account is removed from the company’s receivable listing. An account is considered a bad debt when there has not been a payment received in 180 days. Many businesses forward their bad debt accounts on to collection agencies for further collection activities. Recovering bad debts can be difficult, but it can be done. There are specific strategies than can be used.
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Instructions
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Locate the debtor. A collection agency sometimes has to locate a debtor, which is a process called skip tracing. Sometimes a debtor has relocated several times without leaving a forwarding address. Collection agencies will use every available resource to try and locate a past-due debtor. They can call a previous employer, landlord, personal references, neighbors and even credit references. Credit reports are obtained and the collection agency will call some of the other creditors to see if they have any information about the debtor. A collection agency can also use online resources such as a reverse phone number look-up.
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Offer a settlement to the debtor. Many collection agencies will offer settlements to the debtor for a certain percentage of the balance. Settlements can range from 20 to 75 percent of the outstanding balance according to MSN's Money Central. If a debtor is looking to save money, they may come up with the funds to pay the settlement offer. A significant amount of money can be saved by the debtor if they accept the offer.
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Make payment arrangements. Whenever a debtor has not paid on an account for 180 days they may be have experienced some type of financial difficulty such as losing their job. This and other situations can cause an extreme hardship. A collection agency may have to make payment arrangements that the debtor can pay assuming they have some source of income. Later on the payments can increase if the debtor's situation changes.
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Take the debtor to court. If all else fails, the collection agency can go to court and file the appropriate legal documents to set up a court trial. The debtor will be notified and needs to attend. When ever a debtor fails to attend the trial the court will award a default judgment to the creditor which means the creditor is awarded the court decision, wins the case, and they receive a judgment against the debtor.
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Execute the judgment. Once the judgment is awarded the collection or creditor is responsible for executing the judgment which means they have to try and collect the money due. A judgment permits a collection agency to achieve certain acts such as wage garnishment. Collection agencies can also freeze a bank account and collect the funds in the account. The court can assist with filling out the forms.
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