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When’s A Good Time to Collect or Forget That Debt?

By Andrew Kingstone - Updated on May 3, 2022

Dealing with issues of late payment for your goods or services is not an uncommon situation in today’s uncertain economic and COVID conditions. After all, obligations may be many, and some debtors may not be able to meet all these at one time. Some late payments can be recovered, but some may just not be worthwhile pursuing. Here we wanted to look at some factors when considering whether to pursue a debtor or forget the debt and move on. In addition, we propose some alternatives if collection in full proves to be difficult.

Monetary costs

Debts are an asset, which simply has not converted to cash, but you have provided the goods or services. Most of the time to collect this debt a quick reminder is all that is required. Other times, you may need to chase your debtor for a while to get them to pay up. The question often posed is how much you are willing to throw good money after bad. Many expenses such as phone calls, petrol, or legal fees can all impact your bottom line, just like any other business activities. You should consider whether the outstanding sum warrants the investment required to collect it. The smaller an invoice is, the less money you will want to spend on chasing those payments – is it better to pass over to an agency (provided your terms allow for it) where costs can be passed on?

Time costs

Just like your monetary debt recovery costs, your time spent chasing a debtor will also have an impact on your bottom line. Are you better spending time on larger value creation in your business? Writing letters of demand, chasing customers, and making phone calls are time-consuming, not to mention extremely stressful as well.

Valuable customer

It may happen that a longstanding and valuable debtor disputes an invoice and refuses to pay for services rendered.  Or simply, the debtor is experiencing difficult times and cannot meet their current obligations. This is a difficult dilemma, as people’s circumstances often correct themselves.

Invariably demands wont work, so try to work up a payment plan with a mutually agreeable solution or try an exchange of services. If the amount of the invoice is not large, and the debtor’s issue is temporary, it may even be appropriate to wait, preserving your relationship with the customer – this will be a good opportunity to show goodwill, which may be beneficial in the long run.

Debtor Liquidation / Bankruptcy

If your debtor goes out of business and declares personal bankruptcy, there may be other creditors entitled to some of the funds available, 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 debts, such as purchases on credit, and in many cases, what’s realised from any 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.

Please note that your situation changes considerably after your debtor is placed in liquidation or bankruptcy. If and when this happens legal advice is often your best option. Remember to do your due diligence before extending credit, keep on top of the slow payers and your risk of bad debt will be reduced.

Statute-barred debt

If six 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.

Most simple contracts have a statute of limitations of six years however, this period may be extended by means of a debt acknowledgement from the debtor, court judgements, or other special circumstances. In that situation, it may be appropriate to re-evaluate!

Your alternatives to a collection in full

Often in many situations, you may realise that collecting your debt in full is either too hard, or simply is not possible. In that case, it may be worth negotiating with late payers to recover at least some of the debt or enter a payment arrangement for the amount due. Payment on account is always better than no payment at all.

If you have exhausted all avenues of collection, it may be your preference 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. Check with your accountant on appropriate treatment here.

Debt collection is not free – it takes a lot of time and energy to find, negotiate and discuss any outstanding. That said the older a debt becomes, the harder it becomes to collect it. Your goal should be to get the customer to pay the bill quickly, with the least amount of effort and cost incurred. The best return on time is to streamline your debt collection process, keep it organised, and be professional and to the point when contacting late-paying customers – trivial excuses soon wear out!

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 the options available and make some choices on collectability. As a business owner, you should be aiming to spend your time conducting business rather than chasing outstanding debts.

If you are having a hard time recovering a debt but are not sure you wish to give up because it may still be collectable, it may be the right time to refer the matter to professionals – an external agency.

Here at Gravity Credit Management, we have more than 25 years’ experience in collecting all manner of debts. We do the hard yards while you grow you’re business and we ensure that our clients recover everything owed to them.  Given the amount of experience in this arena we look at your specific circumstances – tailoring the process to your needs, and if there is no collection, there is no payment.

Contact our Managing Director Andrew Kingstone today to get an obligation-free assessment – get in touch at [email protected] or 021987622

Andrew Kingstone, Managing Director
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