How To Collect Bad Debts
A debt can be termed as the liability of a person who has borrowed cash from an individual or a firm. He holds the responsibility to settle the dues as per the terms agreed upon at the time of borrowing. A debt usually carries with it an interest rate payable by the borrower / debtor. This is actually a compensation which the debtor agrees to pay to the creditor as the latter has to part with the money for a stipulated period of time. In the present days debts are of many kinds and are settled in many ways.
Bad debts: Bad debts are those which find no means for settling the debts and no one can be held responsible for it legally or otherwise. These debts arise due to the sudden expiry of the debtor who has no family or relations. Some debtors will declare themselves legally as insolvents and their dues cannot be collected in full. The unrecoverable amount in such cases can be called bad debts. These are only to be written off from the account books and to be added to depreciation if any.
Collecting bad debts: This is a very sensitive method. One should approach the debtor in good terms and try to cajole his attitude in such a way that he feels sympathy over the creditor and finds means to settle the due as much as possible. In this method, the creditor should offer some concessions and rebates in the way of reducing / canceling the interest amount and also coming up to reduce a certain percentage of principal itself to win the sympathy of the debtor. But how far this method will work out depends on the circumstances. Usually it is appreciable if 50 % of the bad debt is collected from the debtor.
Arbitration: Some financial institutions will file a suit against the How to collect bad debts in a court of law. But this is also a method of cracking a hard nut. The maximum punishment awarded to a debtor, in most of the cases will be he has to spend some years behind the bars. After the completion of those hard years he will come back and resume his normal life. But the debt remains unpaid and has to be written off from the books.
Debt collecting agencies: These agencies try their level best to extract cash from the debtors. They adopt the counseling and threatening methods if the debtor is actually capable of settling the dues to a considerable extent. They make confidential investigations about the debtor and act with intelligence to recover the debt. They charge certain percentage of the amount collected for their service rendered. The creditor has to satisfy himself with whatever amount is recovered because there is no other go for him to do.
Bankrupt: This refers to a situation where the banks become unable to repay the deposits of its clients in full. This situation happens mostly in private banks only. It is customary for a bank to invest its deposits in business or issue loams to the public for interest. When loans are issued to a greater extent unmindful of the cash reserve, the cash reserve diminishes and reaches a below minimum level. When there is a delay in the repayment from loaners, the bank finds itself unable to payback to its customers / clients. Now the bank is said to have become bankrupt. Depositors rush to such banks to collect their deposits and there is a run on the bank situation. The depositors will be able to get only a part of their deposits depending on the cash reserve and the bank gives its obligations to pay the balance in due course. The same situation can happen to an individual also and he is said to have become a bankrupt. How to collect bad debts owed by a bankrupt debtor will be paid back on a long term basis or this may be written off by the creditor depending on the situation.
Bankruptcy, in law, is a system of procedures .by which an insolvent debtor may be released from or can modify debt obligations. Generally individuals, corporations and associations whose assets are less than their liabilities can seek the help of law. This law provides three major types of bankruptcy proceedings. They are
(1) The debtors property is sold off by a trustee to pay the debts owed to creditors. An individual debtor can keep a modest amount of household property under federal or state exemptions.
(2) Individuals with regular income who cannot pay their debts can choose adjustment proceedings. In these cases, claims of creditors are frozen until the individual, with the assistance of a trustee presents a plan to pay off the creditors from income. With court and creditors approval the debtor may retain all property. This can be called a long term debt.
(3) The third proceeding applies to business organizations. Here the business is continued by its management or a trustee while creditors claims are frozen pending their approval of a plan. With court approval, the plan can modify or forgive debts, recapitalize a corporation, provide for mergers or takeovers or dispose off assets. Trustees who take the responsibility are either elected by the creditors in a particular proceeding or appointed by the government.
Conclusion: Almost all U.S bankruptcy cases are voluntarily instituted by debtors, although creditors can force a debtor into involuntary liquidation. In liquidation, the trustee inventories the debtors assets and lists creditors clams. The trustee also administers the property and distributes the proceeds. In England, creditors may petition a court to appoint an official receiver as a trustee of the insolvent debtors estate. If efforts at settlement fail, a formal adjudication of bankruptcy will follow. Imprisonment of debtors, once frequent is now usually considered too drastic a remedy except where there has been fraud, false pretenses, concealment of property from pursuit by a judgment creditor or willful failure to pay.
Other Articles
