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Bad debts, as the name suggests, can be a very negative mark on your credit history. Bad debts or doubtful debts are that you can no longer clear or pay off. Yes, it sounds scary, but one can provision these debts, and there are ways in which you can get them off your back. Bad debts are usually involved in failed businesses or companies that have gone into liquidation.

Not many debt holders are aware of the available facilities to recover or account for these bad debts. It is essential that people know about these facilities and use them to get rid of the bad debts.

WHAT ARE BAD DEBTS?

We call a debt a bad debt when the collectors no longer need it, and the debt holder cannot repay due to bankruptcy or some other financial problem. It is an outstanding debt that you cannot repay. Collectors do not want to receive it anymore and are willing to deduct it. Debt holders can get help from the government as well to write it off.

For the government to reduce bad debts, loans from banking and money lending companies should be incapable of recovering it. Different countries have different accounting practices for bad debts. In the U.S., the income tax act of 1961 states the Allowance method. The allowance or GAAP method is one of the best options to clear bad debts.

One other way is writing it off. By writing it off, we mean that if your company’s debt was not payable in the past accounting year, you could write it off as an expense in your income tax. It is otherwise called the Non-GAAP method.

ALLOWANCE FOR BAD DEBTS:

Allowance for bad or doubtful debts is an account that calculates the percentage of receivables that can become uncollectible. Lenders use assistance to clear off the bad debts of their debt holders. It is a fact that you cannot collect all the money you lend to customers. It is where allowance helps a company calculate the percentage of collectibles that have the probability of being uncollectable.

The GAAP method of allowance has the following conditions before it permits you to make an allowance for bad debts:

• The assessee must have used the loan for a business or profession and in the past accounting year.
• If the debt is due from a retired partner, then the assessee cannot deduct it as it is a capital loss.
• An assessment can deduct the loans only he has included in the computation of Income-tax return in the current year or previous years.
• The assessee must claim a deduction for those debts that have been bad for the past accounting year.
• The assessee will be eligible for the deduction only if they have written off the debts they need to deduct from the books in the previous financial year.

Under these conditions, the assessee will make an allowance or deduct the bad debts or doubtful debts.

BUSINESS DISCONTINUED, CONTINUING BAD DEBTS:

In case a debt holder has already discontinued the business before the beginning of the past accounting year, he/she cannot claim a deduction from the company’s profit that he/she is currently continuing. It is by section 36(2) (iii), which states if an assessee has already written off the bad debts in the book of accounts but cannot deduct it by the A.O. because you can still recover the debt. In such a case, the assessee can remove the debt once it becomes irrecoverable.

It is the case for bad debts with discontinued business. You can make an allowance or deduct it only if it becomes uncollectible. If not, you will have it pay it off.

WHEN YOU RECOVER BAD DEBTS:

There are chances for an assessee to encounter such a situation as well. The assessee could have already written off or deducted, or made an allowance for the particular bad debt. But the debt holder can repay it in full, and you, the assessee, have recovered some of the bad debt. In such a case, you will have to write it off as an income in the current financial year when you recover the money in the book of records.

If the debt holder pays only part of the bad debt, then you will have to treat the debt as the standard realization of debt and the rest of the debt as bad debt. If the amount received is more than expected, you must consider the exceeded amount as the current financial year’s income.

Provisions for bad or doubtful debts:

As per the provision for bad and doubtful debts, section 36 allows only banks and financial institutions to deduct bad or doubtful debts. The condition refers to estimating the bad or doubtful debt that an assessee will need to write off in the current financial year.

The deduction and allowance policies of bad and doubtful debts differ from each country. People must be aware of the conditions required to be eligible for a deduction and writing off bad and doubtful debts. Banks and financial companies have provisions, as the bad and doubtful debts amount to money lending companies.

Paying off old debt is very crucial. It can become tough if not given the required importance at the right time. Old debt has astonishing effects on people’s lives and also becomes a burden for the entire family. Old debt, otherwise known as bad debt, has accumulated and is not currently settled by you. The US reported that almost 28% of Americans have at least one obligation in collections. Paying off old debt can be difficult, but it can easily conquer when you followed the right strategies.

Key Points:

• Old debts are debts that you are not currently paying on
• 28% of Americans have at least one debt in collectors.
• Being aware of your debts and listing can help you work faster towards clearing the debt.

BEING AWARE OF ALL YOUR DEBTS:

In November 2020, the US reported a rise in consumer debts by 4.4 % than the past year. Old debt is a huge disadvantage for your credit history, and thus you need to prioritize it to pay it off.

The first and foremost step to clear your debts is to be well aware of how much you owe people. You must have this knowledge, which helps you with other efforts and strategies to pay the debt. It is essential to settle the debt on behalf of a family member, in most cases, the father’s debt. Also, since it is debt that you have not been paying currently, you may not remember the details. Thus it is all the more vital that you sit down and get all the insights into your debts.

Old debts will have accumulated interests. You also should be aware of the people to whom you the money as this will help in negotiation. Being aware of old debt helps make it a top priority, all the criteria required to fight it off and succeed.

LISTING AND NEGOTIATING OUR DEBTS:

The next step in clearing your debts is listing your debts. Once you are aware of your obligations, it is prudent that you list it all down. It can give you a better idea of how much you owe the people and help you develop plans. Keep the list where you can frequently see it, and thus it becomes a reminder and your priority.

Once listed, you need to negotiate with the collectors. Most collectors agree to buy off old debt in a much- reduced amount than the original ones, such as 60% or 75% of the actual debt. Most people go with half of the amount they owe, that is 50%.

You satisfy the collectors with even this as they view your old debts as an income. Also, you must make sure to contact and negotiate one lender at a time. Using your list, tackle your debts one at a time. Trying to pay off multiple debts at once can also have a negative effect. It will not help clear obligations ultimately.

Quick Fact:

 “33% Americans were threatened by their collects about their old debts.”

PLANNING A STRATEGY:

When negotiating with your lenders, you can conclude the amount you need to pay, and you can also determine the duration you have. Once you negotiate, you need to plan your strategy on how you will pay off the debt that you are focusing on currently. You should tackle the smaller debts before trying to pay off debts with massive amounts. Clearing smaller debts is more comfortable and takes less time. It helps you cross off things faster in your list, which can give you a sense of achievement. It boosts you to work harder on paying off your other debts as well.

You can also consider other methods where you can have people to advise and build strategies for you to clear your old debts. Approaching a credit counselling agency or declaring bankruptcy helps you deal with old debt and also begin afresh.

Another important factor in paying off old debt is getting a written agreement about the settled debt. It is proof that you have paid off your debt and can avoid future lender problems. In 2018, in the US, the CFPB reported that they had received complaints from 33% of debt holders that collectors threatened them(www.debt.com). Thus the written agreement can be very crucial, and keep multiple copies of it in your record.

AVOIDING OLD DEBT OR PREVENTING IT FROM RECURRING:

Avoiding debt to accumulate in the first place is better than working on paying it. But some circumstances lead us to such situations. Working to clear debts can take a lot of time, but it will be worth all the effort when you make a list.

The important thing that you need to be careful about is avoiding such situations in the future. You must always be cautious in your spending and make sure to pay your bills on time. It is not still possible but when you get your money, pay off overdue bills before anything else. It can help out a great deal to avoid such situations in the future.

Thus be aware of your expenses and if working on old debts.

An effective debt collection letter can help your client pay his or her debts on time. Using this guide, you will learn how to write a debt collection letter in just a few minutes.

The debt collection letter asks the debtor to pay the debt. In addition, it is possible to inform the debtor of the consequences of not making a payment. After all other collection efforts have failed, a collection letter should be sent.

The letter might be sent to a client who hasn’t paid directly or through a collection agency in the commercial world. A debt collection letter informs the recipient that you are trying to collect a debt from them and that it is their legal responsibility to do so.

In addition, both parties should be provided with contact information so that they can communicate directly over the weekend and outside of regular business hours.

How Are Debt Collection Letters Generally Worded?

The first letter you send to a delinquent customer should be polite, reminding them of their obligation and requesting that they resume payments as soon as possible. Not out of politeness, but because customers sometimes forget to pay or believe they have already paid.

In this case, you should remind them of their financial obligations and request immediate payment. You may be able to assist your customer by offering a discount or payment plan if they have fallen on hard times due to illness or other personal concerns.

As time passes, you continue to receive either no response or no payment. Your debt collection letters should become harsher and warn the customer that they may be subject to legal action if they do not pay. It is often the only way to collect payment from a customer. When people realize you are serious, they will often pay what they owe; otherwise, they may believe you won’t pursue legal action.

Debt Collection Letters: What Are Their Purposes?

Letters sent to creditors to collect debts are called debt collection letters. There are three main purposes of debt collection letters:

Providing debtors with debt information

A debt collection letter is primarily intended to remind debtors of their outstanding balance and original due date. So there is no ambiguity about what is being requested, the letter should include all pertinent debt facts. A debt collection letter should never be sent until the debtor fails to make the first payment on time.

It is often wise to keep your letter cordial and avoid threatening legal action until some time has passed. The customer may simply have forgotten or be experiencing cash flow problems.

• Planned payments

If your debtor is experiencing cash flow problems, a debt collection letter can also help establish a payment plan. If you provide the first payment plan in your message, your non-paying customer may accept it or contact you to modify it. As an example, you may propose a ten-month installment payment plan if your debtor owes you $80,000 but cannot pay the whole amount immediately.

• Informing them of legal proceedings

The main purpose of a debt collection letter is to inform a nonpaying customer that legal action is being taken. In this case, a debt that has been unpaid for a long time is typically pursued. You should send a debt collection letter explaining what legal action may be taken if you determine that an excessive period has passed.

How Should a Debt Collection Letter Be Written?

As you can see, debt collection letters play an important role in debt collection. What should it contain? Your letter must include the following details:

• Debtor’s amount owed
• Debt settlement (initial due date)
• The newly recommended due date for debt repayment
• Paying the debt: instructions
• In your first letter, include a paragraph advising the non-paying customer to contact you if they have paid the bill and you made a mistake.
• A payment reminder is included in the first or second letter
• As the process begins, remind the party that you anticipate dealing with them again as a customer in the future, but you will still expect payment for the amount owed
• A warning that legal action will be taken if the loan is not repaid
• Your letter in the last phase of debt collection must inform the non-paying customer that they may challenge the claim with a validation letter. If you receive your collection letter within a reasonable amount of time.

Writing a debt collection letter: dos and don’ts

• Don’t
  • Don’t use threatening or aggressive language. If you use overly forceful or hostile language, you may not motivate your client and may even do more harm than good.
• Do
  • Be professional and polite, but be clear. Be professional (say please and thank you), but avoid euphemisms that attempt to soften the facts. Keeping your client’s perspective in mind won’t defeat the purpose of the letter if you don’t emphasize the urgency of the situation. Be clear and direct in your language. 
  • Provide as much detail as you can. You should include as many details as possible in the letter, and you should refer to your original contract or agreement to support your claims.
  • Make sure you keep records. If you receive a response to your collection letter, keep a copy.

What are the types of debt collection letters?

Once you know why you’re compiling the debt collection letter, you can choose the format. Here is an overview of the different types of debt collection letters you can write.

1. Letter of reminder

This is sometimes called a ‘soft letter’ and is usually a reminder that the invoice has been sent through but an amount is still owed. In most cases, you only need one reminder letter, but it can sometimes take up to three before you need to initiate legal action. Usually, a reminder letter is sent 14 days after the invoice’s due date, assuming the debtor has forgotten to pay. 

2. Letter of inquiry

You have sent a reminder but have not received a response. In order to maintain good business relations, you don’t want to come off too tough – as you aren’t certain if they simply missed the letter. Don’t be rude, but keep your tone firm. This will hopefully lead to the payment being made.

3. A letter of appeal

After reminding the client, appealing to their better nature, and still, they’re playing hardball, you’re at stage three of the debt collection process. (Alternatively, don’t throw any balls!). Here’s when you need to be tough and indicate that the situation is urgent by implying the consequences.

You can mention in the letter the below points:

The attached invoice for [amount outstanding] remains unpaid despite our previous reminders. Therefore, we would appreciate it if you made this payment as soon as possible.

In the event payment is not received by [ultimatum date], this invoice will be forwarded to a debt collection agency or lawyer. We urge you to either make a payment or contact us about a payment plan before this date to avoid serious damage to your credit rating.

4. Final demand

Three strikes and you’re out! This letter is also known as an ultimatum collection letter or a final collection letter. Maintain a professional but assertive tone.

Mention the below points in the letter: 

Despite our previous reminders on [include dates sent], we have not received a response or payment from you. Due to this, we regret to inform you that we will be forced to take legal action against you if the outstanding amount is not paid in full by [final ultimatum date]. Below are the full debt amount and additional costs:

I recommend that you treat this matter with urgency to avoid court proceedings. Please return the payment as soon as possible.

5. Legal action

It’s now past the point of return, and legal proceedings have begun – but you can give them one last chance to settle. Despite the many warnings that preceded this communication, we need to inform the client that the case is now with the court.

Conclusion

People occasionally struggle to pay their bills on time due to debt, as it is such a common problem. It’s one thing to make a payment a few days late until the next paycheck arrives. 

However, if it turns into a month or more, that’s a different story. A collection agency will likely be assigned to the account when this happens. The debt collector then gets involved. 

It is likely that they will not want to pursue legal action right away, so they attempt to collect money from the debtor. The last thing anyone wants is for their credit to be damaged by a collection account. 

Getting in touch with those who owe you money is a sensitive matter. It’s likely that there are financial challenges involved, which is why it’s taking so long for them to pay. The government requires collectors to follow certain practices to protect these people from potentially abusive collection tactics. 

So In order to get paid, these professionals need to structure their letters carefully. Their efforts will be more effective and ethical if they follow the tips in these debt collection letter examples. 

In this article, we are going to talk about what exactly is credit or CIBIL score and why is it so important. Also, we would discuss some essential tips and queries which would help you to maintain a perfect CIBIL score.

WHAT IS THE CREDIT OR CIBIL SCORE?

Credit scores are an essential parameter, on which a person is judged by a financial institution while applying for a loan.

Whenever you apply for a fresh loan, the first thing the bank would check is your recent credit score. For every individual, the credit score changes every single month. RBI has made it compulsory for all banks to check CIBIL report before sanctioning the loan.

Your CIBIL report contains summarised details about your entire credit records. It’s a three-digit number ranging between 300 to 900 and represents the financial credibility of the borrower, the higher, the better. A score of around 700 to 750 is considered a perfect score.

WHY IS IT SO IMPORTANT?

Every single financial institution uses different criteria to judge a borrower during the loan sanctioning process.

A good credit score is essential during the loan sanctioning process to avail of lower interest rates.

A person with a better CIBIL score not only has higher chances of securing a loan but also he/she can avail of lower interest rates in comparison to a person with a worse CIBIL score.

All banks trust the CIBIL score as it accurately highlights the creditworthiness of an individual.

“A government bank, for instance, has two clear grades — over 700 and under 700 for most key loan categories. A score of 750 to 800 should put in the top grade for most lenders.” “So, if you have a higher score, you may be eligible for the best loan offers, and you will have to pay lower interest on your loan. However, these benchmarks differ from one lender to another” – Adhil Shetty, CEO, BankBazaar.com.

SOME TIPS FOR MAINTAINING YOUR CREDIT SCORE

1. TIMELY PAYMENTS OF CREDIT CARDS:

To a newbie, Credit cards may look like a very lucrative scheme, but they possess some severe consequences if you make late payments. Late payments affect your CIBIL score. So you should make full payments of credit cards on time.

“The more you do this, the higher your score is likely to be. Avoid late payments, especially on unsecured debt like credit cards, because one late payment could hit your score hard,” Adhil Shetty, CEO, BankBazaar.

2. CREDIT SCORE DISPUTES.

Errors in the credit score are not so common, but you should always keep an open eye towards any disputes in your credit score. You can directly resolve disputes from CIBIL from their website.

3. PAY YOUR EMIS ON TIME.

While planning for a big financial commitment like buying a car or house you should always keep a check on your financial capability to repay so that you would still be able to pay your EMI in time.

Not only that you should have a backup plan in your pocket for any financial emergencies, timely payments of EMI help in maintaining a good credit score. It keeps a positive image of yours in front of the lender that you are capable of paying back loans.

4. KEEP AN EYE WHILE AGREEING ON A JOINT LOAN APPLICANT.

If you are applying as a joint applicant for a loan for your relatives, friends, etc., you should always be aware that if your acquaintance is unable to pay back their loan amount, along with theirs, your credit score would be affected.

LET’S DISCUSS SOME COMMON QUERIES REGARDING CIBIL SCORES.

1. Should you maintain old credit cards?

If you are making timely payments on your credit card for a long time, it will positively affect your credit score. It shows that you are economically stable enough to pay back your credits, and this factor would benefit you in your loan sanctioning process.

2. Should you withdraw cash from credit cards?

No, it is one of the most common mistakes which people make, that in the long term negatively affects them many financial institutions charge a higher rate of interest for withdrawing cash than just using it for transactions.

3. What should be my credit utilization ratio?

Many financial experts advise maintaining a credit utilization ratio at around 30%. It means that you should not be using your credit card to make your every single financial transaction.

4. How many times can I apply for loans and credit cards?

There is no upper limit but most financial experts advise refraining from multiple credit inquiries. You should apply for an additional loan and credit card only when it is highly necessary; this would help in maintaining a good credit score.

Are you looking to Increase your CIBIL Score? Contact us

Collecting past-debts is necessary in any b2b business, but most of the b2b businesses facing this as a common challenge due to non-payment of customers. Tracking down unpaid debts is yet another task that should be applied to a long list. And it’s no wonder businesses may ignore too many past due accounts after a significant period of time has elapsed. Read more about the lof the ocean slot. However, by taking a positive approach, debt recovery is almost possible. When it comes to chasing off unpaid B2B payments, you need to follow the proactive approach that has been explained below.

1. MITIGATING THE RISK

The fact of the matter is that following a constructive approach mitigates the possibility of non-payment. Business owners who neglect enforcing past due accounts reduce collection chances. The curve is exponential and so it is important to proactively seek debt recovery.

So how do business owners of B2B employ predictors to make debt pursuance more efficient and successful? Collection of debts needs to be a top priority. So it’s important to know where to start.

2. MONEY UPFRONT

It will be difficult for some B2B company owners to ask for payment upfront. Requesting payment before goods or services are supplied is not always the stipulation. Nonetheless, requesting a deposit is a possibility, particularly for larger orders. Requesting a down payment clearly sends a key message to the customer. This may be adequate to receive the remaining amount due on time.

3. HAVING A CLEAR POLICY FOR DEBT COLLECTION IS A MUST

Another problem faced by most of the B2B businesses is that there is often no dedicated debt collection department. Since nobody wants making a debt collection call, it is common for procrastination and delay to occur. In the meantime, the account is continuing to go further and further past due. Hence, a clear policy on debt collection is a must.

For this purpose, a business needs to set up a strict system for who is going to make the calls, and at what point. There must be a process outlined, which involves contacting the non-paying customer through specified methods and at specified times only by adhering to the proper guidelines.

4. ASK FOR PAYMENT IN 7 DAYS

Most companies have to pay within 30 days. The problem is, the customers aren’t silly. They will figure out this implicit grace period and withhold payment as long as they can. It’s so common that it even has its own name and is called Payment Timing Optimization. So, make your terms 7 days, since most of the communications and payment transactions are electronic these days, so it is quite reasonable for any company to do so.

5. UTILIZING B2B PAYMENTS FINTECH

Modern technology has a key role to play in proactive debt collection. B2B payments fintech is now out there, allowing companies to harness the power of machine learning. The company is collecting data from the previous financial activity of the customer. Doing this helps the company determine whether or not it is likely to make a payment. . When a company identifies individuals who are most likely to pay, it can put in place the right proactive approach.

When considering b2b fintech payments, it is important to consider the payment process. Are B2B customers only able to use cash or cash checks for payment? If so, it will come as no surprise that payments are not made on a regular basis. Facilitating timely and convenient payments is a key to success. By adopting the latest state-of-the-art B2B payment solutions, business owners can simplify and streamline their debt collection process. By setting up an IVR telephone payment system and a web portal, making payments is made simpler and easier. Customers can use their preferred payment methods and pay for them at a time. As a result, the collection of debts becomes simpler, faster and more efficient.

At Kenstone Capital, we offer a proactive approach in providing our clients with non-contentious solutions through our friendly debt collection services. We keep your cash flow by offering reliable and fully compliant solutions to B2B businesses.