How many “bad debt accounts” do you have? How many of these do you expect to ever
finally collect? Actually, the reason most “bad debts” are never collected is because the
holder of the bad debt eventually forgets about them because of the collection effort, or
else simply writes them off as another income tax loss
So, if you’d like to collect some of those bad debts you’ve got stashed away in a special
file at the back of your file drawer, the first thing you should do is set up a regular routine
for dealing with these debtors and follow through on a collection plan. You should
definitely investigate each new debtor’s credit rating before you advance him any
credit. Tell him of your credit terms verbally, and print them on your bills, and also state
the debtors are liable for reasonable collection fees. If you make it a practice to bill
your debtor promptly, you’ll find that your debtors are more apt to pay promptly. On
the other hand, if you run your business in a slipshod manner, you’ll find your debtors
slipshod in their dealings with you.
If it’s a real estate debt, always re-read the terms of the note and know your state’s laws
about notifications of default and time limits. It is important to “start the clock” immediately
when you do not receive a payment on time. Otherwise you are losing money!
Should a debtor fall behind in his payments, you should start with a mild past-due
letter to remind him, perhaps alluding that he may have forgotten the due date of his
payment. With this letter, you should definitely include a duplicate invoice stamped, past
due. Give him the exact amount he owes, including late fee, and the warning that if he does not
pay immediately that you will have no choice but to proceed with foreclosure (or a collection
agency, if a non-real estate note).
If you do not receive payment within a few days, send a second letter, this one more
strongly- worded than the first, but at the same time in a dignified and courteous tone.
The important thing here is to demand some sort of communication from him about this matter.
Your state laws will determine the form and timing of subsequent notices. If this is a consumer
debt, send a third letter, this one very firm but still polite, giving him a date at which you will turn
his account over to a collection agency. If you have not received payment by that date, do it.
No one likes to be on a collection agency’s list, and once your debtor find out that you
will indeed, turn their accounts over to an outside agency for collection, they’ll quickly
accept the fact that you’re running a “tight ship”, and not try to use you for a soft touch.
Be consistent in your collection procedures, and don’t allow special favors. Set up a
regular routine for collecting from past due accounts, and then stick with that procedure.
Something else worth mentioning is the fact that unless you have supporting evidence to
show that you have attempted to collect your bad consumer debts, the IRS will disallow you to write
them off as a business loss.
Some of the things to keep in mind… Your collection letters should contain the date,
name/address of the debtor, a description of the merchandise involved or the services
rendered, and the amount due. It’s also a very good idea to include a self-addressed reply
envelope in order to make it easy for him to mail his check.
Something else to consider is the use of imprinted envelopes with the phrase Address Correction
Requested so the post office will provide you with a forwarding address in case he has moved.
In almost all cases, you should address your letter to a specific person, not to either the
purchasing department or the company in general. In other words, it should be your
endeavor to try to continue your relationship with the person who signed authorization for
the purchase in the first place. Your letters should be firm but reasonable, and should
leave the debtor an opportunity to set up a schedule of payments or an honorable way out
of his financial problems.
Telephone calls work very well in that they usually catch the “slow payer” off guard, and
can result in his promising to pay by or on a certain date. The thing is though, before you
start calling on bad debts, be sure that you’re thoroughly familiar with his account, and
that you have his file in front of you when you make your call.
You or one of your agents might make a personal visit to see him and discuss the reasons
why he hasn’t paid, but if he doesn’t want to talk to you and orders you off his property,
you must not argue or attempt to reason with him. The only thing you can do in such a
situation is to leave without further words.
When you do visit the debtor and he offers a partial payment, by all means accept it. Start
by demanding the whole amount, but be ready to accept whatever he offers, and work out
some sort of payment schedule from there. If you can’t collect the money, try bartering –
in other words, trade the price of your bill for something he has that you can either use,
sell or trade. Only as a last resort should you attempt to take back the merchandise you
sold him.
One other thing, if you claims to have mailed you a check more than a few days ago –
long enough for the check to have reached you – demand that he stop payment on it and
issue a new check. Above all else, keep cool and don’t argue or become threatening
towards him.
To get results, collection letters should be distinctive. Some companies use a special
letterhead printed in red ink which attracts the eye better than any other color and gets
maximum attention. At the same time, a great many of the collection agencies say that
smaller than standard sized paper, plus the use of paper that feels and looks expensive,
always gets getter results.
Never use humor in a collection letter. If you do, your recipient won’t take your collection
efforts seriously. Maintain a sense of urgency, but don’t imply that you’re angry – serious,
yes – but angry, no. The psychology behind the tone of your collection letters is simply
that the recipients tend to duplicate it.
You should send out your letters over planned intervals – about once every 10 days or two
weeks. This will work in your favor because when several creditors are on a debtor’s
heels, he generally responds the fastest to whoever is the most insistent.
Be sure you don’t ever defame a debtor in writing. To do so will give him a chance to
“hang you” for libel. To always make sure you’re within your legal rights when trying to
collect a bad debt, keep these rules in mind!
Address yourself only to the person responsible for the bill that’s owed.
Send your collection letters in sealed envelopes to ensure that other people don’t see them.
When phoning him or her, don’t discuss the nature of the call with anyone else. Don’t
attack him or her personally, even is what you say about them is true.
It’s okay to disclose the next step in your collection efforts – you’re going to turn his
account over to a collection agency, or forecloset – but don’t describe what will
happen to him if he doesn’t pay.
And finally, always make it as easy as possible for a bad debtor to pay up.
Thousands, even millions of “bad debts” can be collected – but, it takes a planned
collection procedure and the tenacity to last them out.
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