Why Record Keeping is Important to Collecting Debts
Despite what many people think, debt collection does not have to be costly or painful. Good debt management involves adhering to appropriate contact practices, respecting the debtor’s privacy, and, crucially, keeping comprehensive debt collection records.
It may be tempting, especially if you run a small business or work with just a few big customers, to rely on your memory, keeping agreements and other details in your head. Memories, however, tend to be short and inexact. Throughout any debt collection efforts, all relevant information should be accurately noted and stored, to ensure that each step of the collection process has been agreed, and clear details have been set as to how and when the debtor will repay the amount owed.
Read on to find out more about the requirements, benefits, and best practices of successful debt collection record keeping, and how to apply them to your business.
Australian Debt Collection Guidelines
The Australian Securities and Investments Commission (ASIC) and the Australian Competition and Consumer Commission (ACCC) have set out an operative framework for the debt collection industry. This set of guidelines, first published in 2005, was reviewed in 2014 to address common concerns and encompass recent legal judgements. The debt collection guidelines for collectors and creditors outline industry best practices, including reasonable grounds, methods, and hours to contact debtors, and stress the importance of good record keeping.
Keeping accurate and up-to-date debtor records is also a legal tax requirement mandated by the ATO to ensure the transparency and auditability of Australian businesses. In fact, you may be penalised for failing to keep adequate records, failing to keep records for the required periods of time, or for resulting inaccuracies in tax returns.
Benefits of Good Record Keeping
With the possible exception of accountants, few people find record keeping exciting. Still, good record keeping presents indisputable advantages to businesses small and large, especially where debt collection is concerned.
Easy to access, organised information will enhance your productivity at work, ensuring you can retrieve the relevant documentation quickly. It will allow you to monitor any unpaid debt and prioritise your debt recovery efforts. Accurate record keeping will also assist in determining whether a debt is statute-barred by making it easier for you to identify and calculate any relevant dates, for instance, when the debtor’s last payment was made. Ultimately, good record keeping can help you to recover customers’ overdue payments and optimise your cash flow. Besides, the longer a claim remains open, the more likely it is to end up in court, so it pays to facilitate early resolution and prevent costly legal proceedings. A word of caution is in order here: debtors are entitled to request copies of documentation relating to their debt. Presenting inaccurate or misleading information may be grounds for legal action against you, so your ability to document your debtors’ financial obligations will be crucial should the debt recovery process ever lead to court.
How to Keep Good Records
So, which information should you track in order to comply with the ACCC guidelines and ensure a successful record keeping strategy for your business? The guidelines specifically require current, accurate, and complete records of all communication with debtors, including any transactions, and relevant documentation.
Let’s start with the first item: communication. Records of communication should comprise of every contact (made or attempted) with the debtor regarding the debt, including visits in person, phone calls, voicemail, and any correspondence (electronic or hard copy) such as invoices and past-due notices. Transaction records should include any payments made (including partial or full settlements), complete with date, amount, and payment method. Finally, keep track of any documents such as contracts outlining payment and credit terms.
Good record keeping entails ensuring that your records are complete, organised and easily accessible. This will not only save you time when you follow up on debts, but it will also make for a smoother process when debtors, or the ATO, request to view these records. Besides, good records allow you to quickly ascertain the age of a given debt, and its standing with regards to the statute of limitations. An excellent approach is to develop a template ahead of time for recording conversations with debtors, and keep a register such as an Excel file for a quick overview of what’s outstanding. If you agree to something verbally, we recommend you make a concise record of the conversation, using quotes where appropriate, and follow up promptly with confirmation in writing.
Once a financial obligation is settled successfully, you should ensure that it is excluded from any debt that is assigned or contracted out for collection, and provide an appropriate update to any relevant credit reporting body that holds information on the former debtor.
What about record archiving and storage? The ATO requires small businesses to keep business records for at least five years. You should be able to quickly access files with all relevant information on each debtor, and must ensure that they are kept up-to-date. You can choose to keep either hard or paperless (electronic) copies: the ATO and ASIC allow for records to be kept in either form, as long as they are in English and clearly explain all transactions involved. The best strategy is a combination of both. For key documents, such as the original copies of contracts, keeping paper copies may assist you in case of contractual disputes. For more routine communication, such as invoices and bookkeeping, electronic archiving may be preferable. Water, sunlight, and age can deteriorate paper records; electronic archiving, on the other hand, provides a solution that protects from the elements, saves space and time, and is environmentally responsible. Searching and sharing electronic documents is also incredibly easy, and can be done with just a few clicks.
You can start an electronic storage system directly on your local drive. A variety of software and apps exists that can aid you in optimising your management of electronic documents. Some are Standard Business Reporting (SBR) enabled, meaning that they seamlessly integrate with ATO reporting and can save you lots of time. If you decide to go paperless, you may also want to backup your records, either on an external hard drive or via an online storage account. Several recently publicised incidents have underlined the importance of having a back-up in place: data corruption, viruses, and unauthorised access can all impact the security of your records, which should never be neglected. Apple, Dropbox, Amazon and Google all offer both free and paid storage options, depending on your system requirements and needs.
What about your existing physical records? You can scan or photograph these documents, and store them locally or online for easy retrieval.
Keeping good debt-collection records should be part of your overall accounting and bookkeeping strategy. Debt recovery is a business in which preparation is 80% of your success, so it’s essential to establish good record keeping procedures, in which relevant information intuitively becomes part of the customer’s history.
Statute of Limitations
What is a time-barred debt? Also known as statute-barred debt, it’s a liability on which the legal limitation period has expired, a situation that renders the debt too old to be taken to court. As a debt collector, you have a limited number of years to sue your debtors for money they owe you. This period is defined by the statute of limitations. The statute of limitations varies by state and type of debt; the period is usually six years, but it can be reset by factors including the receipt of partial payments or admissions of the debt. It is then in your best interests to keep accurate records of any such acknowledgements by the debtor, so as to extend the timeframe actionable for debt collection.
Debt collection requires efficient record keeping in order to be successful. Working smart and ensuring you have all the relevant information at your fingertips will aid you in getting your debtors to settle their debts. Follow the best record keeping practices outlined in this guide to optimise your own recovery efforts. If you still experience difficulty collecting your debts, you can contact a specialised collection agency such as ProCollect to professionally manage debt recovery for you.