Monday, 5 November 2018

When To Collect – And When To Forget – A Debt

Dealing with issues of late payment for your goods or services is not an uncommon situation in today’s uncertain economic conditions. After all, we all face a multitude of obligations, and some debtors may not be able to meet all of these immediately. Some late payments can be recovered, but some may just not be worthwhile pursuing. Here are some factors to consider when deciding whether to pursue a debtor, or forget the debt and move on, as well as an overview of alternatives if collection in full proves to be a challenge.

Monetary costs

In accounting terms, outstanding debt is an item in your accounts receivable. This means debt is an asset, which simply hasn’t come in as cash yet. Sometimes all it takes to cash in an debt of this sort is a kind reminder; many late payments are due to a misunderstanding or simple forgetfulness. Other times, you may need to chase your debtor for a while to get them to pay up. But how much are you willing to spend in order to cash in your asset? Expenses such as phone calls, petrol, or legal costs can all impact your bottom line, just like any other business activity. You should consider whether the outstanding sum warrants the investment required to collect it. The smaller an invoice is, the less money you’ll want to spend on chasing payment.

Time costs

Just like your monetary debt recovery costs, the time spent chasing a debtor will also have an impact on your bottom line. Time is also an asset; you are investing your time in recovering what’s owed to you. Writing letters of demand, chasing customers, and making phone calls is time-consuming, not to mention stressful. Therefore, you should ask yourself if collecting what you are owed is worth your while. The answer may be more straightforward than you think; know your time’s worth and consider the opportunity costs involved in collecting a debt. Instead of following up on old business, could you be spending your time doing new business? Say you are a busy professional photographer, who has some fixed costs to cover (such as rent) but minimal variable costs. You bill your clients at a rate of $500 for a 2-hour session. It’s probably not worth chasing a $500 payment if the follow-up takes longer than 2 hours. In this case, the potential of recovering the debt is fully offset by your cost to collect. Your time may be better spent elsewhere.

Valuable customer

Sometimes it happens that a longstanding, valuable customer disputes an invoice and refuses to pay. Or conversely, the customer is going through a rough time and quite simply cannot meet their current obligations. What to do in such circumstances? Aggressive collection tactics, such as harassment or manipulation, may be counterproductive or detrimental to your cause, and are expressly forbidden by the ACCC.

Rather than giving an ultimatum, try to come up with a mutually agreeable solution, such as a payment plan or an exchange of services. If the amount of the invoice is not an exorbitant sum, and the issue is temporary, it may even be best to bite the bullet and wait, safeguarding your relationship with the customer – this could be the perfect opportunity to show some goodwill, which may pay off in the long run.

Debtor bankruptcy

If your debtor goes out of business and declares bankruptcy, there may be other creditors entitled to compensation, just like you. Your debtor’s assets will be liquidated, and the debts prioritised according to the category and number of creditors. For instance, secured debt, such as a mortgage, will take priority over non-secured debt, such as purchases on credit, and you may realise that the debtor’s assets won’t be enough to satisfy all obligations. In this situation, you may not have much choice other than to forget about collecting this debt, even if your debtor’s circumstances might change in the future.

Keep in mind that the rules of the game change considerably after your debtor files for bankruptcy. If this happens, it is advisable to consult a lawyer or a professional debt collection agency to ensure you adhere to the correct debt recovery procedures. Your best defence against bankrupt customers is prevention: do your due diligence before extending credit, and your risk of bad debt will be significantly reduced.

Statute-barred debt

If several years have passed and a debt still has not been paid, it may have reached its time limit under the statute of limitations. This means that, once the debt passes a prescribed term, you cannot take legal action to recover it anymore. According to Australian law, except in the jurisdiction of NSW, the debt will still exist, though you won’t be able to pursue it in court. Conversely, in NSW a debt is considered to be fully extinguished when the prescribed period expires.

Most simple contracts have a statute of limitations of six years (three in the Northern Territory); however, this period may be extended by means of a debt acknowledgement from the debtor, court judgements, or other special circumstances. While, with the exception of NSW, statute-barred debt is still a debt after its statute of limitation has passed, it becomes decidedly harder to collect. In that situation, it may be best to re-evaluate whether such late payment is better forgotten, and move on.

Your alternatives to a collection in full

In some situations, you may realise that collecting your debt in full is either too hard, or simply won’t happen. In that case, it may be worth negotiating with late payers to recover at least some of the debt. Partial payment is always better than no payment at all.

If you have exhausted all avenues of collection, it may be preferable to take the financial hit and write off bad debt. Writing off a bad debt essentially means that you are deducting the amount from your bottom line. The ATO allows you to ask for a tax deduction for bad debt in the financial year of income if certain conditions, such as written evidence, are met. If you are using the accrual method, you may also be able to claim a refund of the GST paid. This may be stating the obvious, but if you write off a bad debt, you essentially forgive it, foregoing the right to collect it in the future.

Debt collection is not free – it often takes a lot of time and energy. At the same time, the older a debt becomes, the harder it becomes to collect it. Your primary goal should then be to get the customer to pay the bill quickly, with the least amount of effort and cost on your side. To get the best return on your time, streamline your debt collection process, keep it organised, and stay professional and to the point when contacting late-paying customers.

Some payments might not be worth the trouble it takes to collect them. If you see that your efforts on a specific account are using a lot of resources, consider cutting your losses and count it as a lesson learned. As a business owner, you should be aiming to spend your time conducting business rather than chasing down debts.

If you are having a hard time recovering a debt but don’t want to give up because it may still be collectable, it may be the right time to refer the matter to the professionals. At Pro-Collect, we have over 35 years’ experience in collecting debts large and small. Every day, we strive to ensure that our clients recover everything owed to them. We can offer expert advice tailored to your specific circumstances, and if we don’t collect, you don’t pay. Contact us today to get an obligation-free assessment.

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