Settling past-due collection accounts: Sometimes it’s better to cut your losses

Posted by Ryan Howard

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When attempting to collect on past-due invoices, accounts receivables and collections departments have to weigh the options of fighting the good fight or writing off the account. Collections may be worth it if the some or all of the debt can be recovered. The Steve Miller Band once said, ‘Go on take the money and run’. With certain past-due collection accounts, sometimes this is great advice. 

Some Past Due accounts may not be worth the time and effort.

When Accounts Become Problematic

Some customer accounts may reveal themselves as problematic after time. These accounts typically involve disputes, older debts and / or high-dollar balances. Accounting and collections may have exhausted all options to collect internally but may still have an option through a collections agency. Here are clear examples of accounts that may need to be turned over to a collections agency before being written off:

  • Customers that refuse to pay or state that they have no intention of paying off the debt
  • Customers that disappear or are otherwise untrackable
  • Customers that promise to pay, but never do or pay very little at a time with seemingly no intention of paying in full
  • Customers that declare bankruptcy

Older debts may also raise challenges when it comes to collecting. Every state has a statute of limitations on collecting certain debts. 

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When to settle Bad Debts

Keeping accounts open from one tax year to the next can be confusing and complex, especially for accounts receivable tracking under an accrual-based system. The IRS allows businesses to use accounting methods to write off bad or uncollectable debts but often, settling a debt for a smaller amount can also close out an account for the year. There is no telltale sign that will decide if an account should be settled or forgiven. The decision really comes down to whether an offer for settlement works.

Settling a debt with a customer makes the customer feel as if they've "beat the system" in some way. Settlement can also be a "win" from a business standpoint. Even though the customer may owe a certain amount, businesses may be spending valuable time and resources attempting to recover debt from customers who refuse to pay.


Working with a Collections Agency

Again, when all options to collect internally are exhausted, a collection agency may still be able to recover some, if not all, of the past due debt. If a business is willing to settle for a lower amount, this information must also be transferred to the collections agency. When the account is written off to collections, negotiate and authorize settlement parameters for your accounts. If a customer refuses to pay 100% of the amount owed, knowing when and how much to settle for is a key element to resolving the account. After all, "80% of something is better than 100% of nothing."

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Topics: Debt Collection