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You’ve contacted your customer.

Sent letters. Made phone calls. Followed up again and again.

All with no response, no success at all. Now what? Where do you go from here?

Well, the first step is deciding if you’ve done all you can to get paid. Here are some criteria that you need the next step:

 

  • The account is very old. This is probably one of the first indicators that a debt just can’t be collected. If you’ve tried and tried and haven’t gotten a response, chances are you won’t be getting one.

  • You’ve tried reaching out to your customer. You’ve done your due diligence, making follow-up phone calls and sending reminder letters to no avail.

  • Your customer has changed their contact information. Even worse than unresponsiveness is if a customer's contact info is no longer valid and they haven’t given you a new way to reach them. They haven’t paid, and they’ve disappeared on you – that’s a good indication you won’t be getting paid for your work.

If you’ve tried every trick in the book, it’s time to admit: you’re not going to collect this debt. At least not on your own.

Basically, you have two choices: claim it as a bad debt and write it off, or seek the help of a commercial collections agency for one last attempt at collecting the money. Let’s take a look at each.

What is Bad Debt Write Off ?

 

What is Bad Debt Write Off

Bad debt is debt that is deemed uncollectible, usually after multiple attempts have already been made to try and collect the delinquent debt. If you want to claim your delinquent account as a bad debt, you can write it off.

Even once you've decided a bad debt is absolutely uncollectible, it still remains on your books; a black mark on your otherwise neatly managed ledger. So in order to be released from this unpaid balance, you can write off the debt.

What Qualifies as Bad Debt?

 

Start by determining if it’s definitely the right time to take this step. Because once you write off a debt, it’s off the books, but you also need to qualify it with the IRS. While debts can be written off, not all bad debts qualify as business deductions.

To have your debt qualify, you must prove that:

  • The debt is owed to you

  • You have already counted the debt in your income (if you use cash basis accounting and the money doesn’t hit your books until you are paid, you can’t qualify)

  • The debt is related to your trade or business

  • You did all you can to try and recover the debt, and that the debt is now considered unrecoverable

To write it off, deduct the actual amount from your sales revenue. In other words, reduce both your accounts receivable by the amount of your bad debt. In order to count the debt as a business deduction, you will need to report it as a loss on Form 1040, along with Schedule C and A.

What is a Collections Agency?

 

What is a Collections Agency?

Contrary to completely giving up and writing off the debt, you can seek out the help of a professional debt collections agency. A debt collections agency could be your last attempt before giving up and writing off the debt.

Why? Because a debt collector may still be able to collect your money even when all your own efforts have failed. They come with years of experience, and will be able to focus all their efforts on recovering your debt, whereas you have many other things to do. Debt collectors also have better and more specialized tools and methods to help them find your debtors and communicate with them.

In fact, hiring a debt collections agency before giving up and writing off the debt has a few other benefits as well, such as:

  • Legal protection. When you get deep into debt recovery, there are many laws you must abide by, including when and where you can call your debtor. The collector also needs to have the correct licenses, including the license to collect debt in the particular state your debtor resides in. Hiring a professional debt collector ensures your collection efforts are compliant with the laws.

  • Documentation. When a collections agency makes any type of contact with your debtor, they keep detailed records of it. While this may not seem like a big deal now, it could come in handy later. If you ever need to take your debtor to court over the matter, you'll have the documentation to back your efforts up. Also, if the debt isn’t recoverable and you end up claiming the bad debt as a tax deduction, you'll need backup documentation.

  • Free up your time. Chasing after a delinquent debt can become very time-consuming. Hand over your debt collection needs to the experts, and free up your own precious time for things you are better suited for, like running your business.

Preventing Delinquent Debts

 

Prevent delinquency

Bad debt write off or collections agency – what's the answer to your debt? The best position to be in is one where you don’t have to choose at all. There's a lot you can do to prevent accounts from getting to this point. To increase your chances of getting paid, follow these tips:

  • Communicate with your customers. Continue to communicate throughout the entire work process, and after the invoice has been sent.

  • Offer payment incentives. Can you afford to offer a small discount for early payment? Or maybe an even bigger discount of payment upfront? The difference in income can easily be made back in saved time and hassle chasing payments.

  • Accept more than one form of payment. Make it extremely easy for your client to pay you. Let them choose from cash, check, credit, PayPal, etc.

  • Watch for any red flags. If you notice clients start getting distant once the invoice has been sent, it’s an immediate red flag that they may be avoiding paying.

  • Stay on top of your invoices. The longer an account goes unpaid, the less chance you have of recovering the debt. Stay on top of any payments owed, and send follow-up emails and phone calls as you approach 30-days and 60-days past due.

Write offs and debt collectors both have their advantages – each business and account can vary in which is the best way to get paid. But when all else has failed, you may still be able to recover all or part of your money owed by teaming up with an experience debt collector.