Bad Debt Collection

What is a bad debt?

A bad debt usually refers to the type of debt that cannot be repaid or is not likely to be repaid. Although from a consumer perspective, all debt is likely to be bad debt because it takes so long to pay off, in the sense of finance, some debt is good debt where the person repaying the debt can afford to service the loan and continue making repayments in the foreseeable furture. This type of debt is encouraged by finance companies whose business is dependent on lending out money to debtors. The terminology of a bad debt comes from when the loan is defaulted on or repayments become unreliable and the debts begin to accrue interst which the debtors have no hope of ever repaying. This type of debt which is uncontrollable and creates a vicious cycle of spending and incurring interest is toxic as can grow ewith exponential speed in its effects.

How do I avoid ‘bad’ debt?

One of the most common way that people get into ‘bad debt’ is through credit card repayments. If you have a credit card, and miss a set of repayments such that you incur the high rates of interest which apply to most credit cards you can very quickly get into a cycle like this. Try to minimise your spending as much as possible and ensure that whereever possible you obtain better deals on interst through tools like loan repayment variation facilities, balance transfer cards and lines of credit.

What do I do if I suspect that one of my debtors will become incapable of paying for the debt which they have accrued?

This is a very difficult situation, because on the one hand you need to have your money returned and you cannot really trust the debtor to tell you honestly how much they are capable of paying towards the debt, but you do not want to breask all ties with them in a way that will mean that they will pay nothing at all in the future going forward. This aspect of debt collection is very delcated because there is balance to be struck between enforcing what the debtor agreed to and promised to pay and ensuring that there is still enough trust and goodwill such that they will be motivated to take the steps to ensure that they can pay and continue to pay on time. In the situation of most small businesses, they will often find themselves effectivele issuing credit to other businesses or individuals through trade credit. This is no different from a bank and should be treated as a bank like transaction. However, if a debtor is genunienly unable to pay their debts then they may be looking at a situation of insolvency. This is a very difficult thing for the creditor because it is typical that in all insolvency situations creditors only receive a fraction of what they are owed. When a company is liquidated or an individual goes bankrupt and in terms of the books you may have to face the possibility of writing such a transaction off as a ‘bad debt’.

Debt Collection Letter Resources