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Collecting Past Dues or Writing Off Bad Debt?

January 22, 2015 by Ed Becker

Collecting Past Dues or Writing Off Bad DebtTrying to collect past due accounts can be very frustrating. Sometimes it is a bad idea to allow credit on some accounts. Once you have a past due account, that customer should not be allowed to carry a balance again. How can you collect on past dues and when should you choose to write them off as bad debt?

Collecting on past due accounts

Create an aging report on accounts receivables. This way you will know at any moment who is past due and how long overdue the account has become. Once an account goes past 30 days, it needs to be tracked closely. Statistics show that once an account becomes 30 days past due, the chances of collecting decrease the longer the debt goes uncollected.

If your terms are net30 when day 31 comes around, you should be on the phone calling the customer in a friendly manner to find if there is a problem. At this point you do not want to be threatening; it is possible that the bill was overlooked.

If the customer is having cash flow problems you could offer a payment plan. Keep these plans simple but detailed. Agree on amount and frequency of payments. Try to not allow the plan to drag out more than six months. Also make the customer aware that any new orders are COD.

If calls do not work and you cannot work out a payment plan, send out past due notices. These should be firm, but not threatening. If you receive no response to written past due notices or phone calls and the account is past 90 or 120 days, it is time to get tougher. Send a notice that the account needs to be paid in full within seven days or it will be sent to collections, at the customer’s expense. This is a serious step and will damage the relationship with the customer. The only other option is to write off the bad debt. Weighing the cost between collection agencies or writing it off will help you decide on a strategy.

Writing Off Bad Debt

If you have made diligent attempts at collecting a debt and still have not recovered the full balance it is time to write it off as the debt has become worthless to your company. In order to prove the bad debt you will need your invoice and documentation of reasonable collection attempts. This means that you need to document each phone call and save copies of any mailed correspondence.

You can claim the deduction in the tax year that you realize the debt became worthless. You can also deduct the partial bad debt that became worthless. If the debt was debt from a previous year, but you only just realized it was worthless, you can write it off this year. If you had debts that you did not write off in previous years you can amend your tax return.

Note: Cash basis businesses can only deduct bad debts that were included in their gross income.

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