What is known as a” bad debt recovery” is a method of trying to obtain a partial or full payment of any debt which has been written off because of non-payment. Companies occasionally carry out this type of conduct after taking steps to designate the size of the debt as uncollectable inside their accounting records.
- For this reason, any amount which is actually gathered as a result of bad debt recovery attempts is typically viewed as new income.
Practically all businesses have encountered some bad debt experience at some time in their past. Banks will occasionally write off any negative balances on overdrawn accounts as a bad debt, if any attempts to sway the customer to make a deposit and try to restore the balance to zero, prove useless.
Balances and Allowances
Providers of credit cards will at times dismiss balances on accounts and deem them as uncollectable, instead of continuing to carry the balances in their receivables. It is quite common for a business to maintain a budget item which is called an allowance for bad debt, using the resources of the account to cover for any uncollectable debts.
- And while this aid in keeping the accounting records in order, it does not stop the recording of later transactions if it happens that a full or partial bad debt recovery occurs.
One thing that a lot of consumers are not aware of is that after a debt has been written off as being either bad or uncollectable, the business can still take steps in considering a disaster recovery solutions comparison of what can be done, to at least recover part of the loss.
1 – One method is by assigning the bad debt to a collection agency, which then lets them go ahead with attempts to contact the debtor and try to arrange a repayment schedule. This option usually operates on the collection agency keeping a percentage of the collected amount to pay for its efforts.
- After that percentage has been deducted, the remainder is then forwarded to the original creditor, where it is written down as a recovery from a bad debt line item.
2 – A second approach involves the selling of the uncollected debt to another company. Making use of this solution, the original creditor then sells the debt for a small percentage of the full outstanding amount.
- The purchaser then takes on the risk of attempting to collect the full amount, whilst the original creditor can then go on to record a partial recovery of the bad debt in its financial records, and close the matter completely.
Any Recovered Portion is treated as Income
Because companies happen to write off bad debt and remove the debt’s balance from their receivables, the procedure of bad debt recovery, then calls any amount of the recovered debt to be viewed as income.
For any bad debt recovery solution, consult with professionals in the business.