How many bad-debt accounts do you have? How many of them do you ever expect to collect? The reason most bad debts are never collected is that the holder eventually gives up on the collection effort and forgets about them, or simply writes them off as another income tax loss.
If you’d like to collect some of the bad debts stashed in a file at the back of your drawer, the first step is to set up a regular routine for dealing with debtors and to follow through on a collection plan.
Set up your routine before trouble starts
Investigate each new debtor’s credit rating before you extend any credit. Explain your credit terms in person, print them on your bills, and state that debtors are liable for reasonable collection fees.
If you make a practice of billing promptly, you’ll find your debtors more likely to pay promptly. If you run your business in a slipshod way, you’ll find your debtors slipshod in their dealings with you.
If it’s a real estate debt, always reread the terms of the note and know your state’s laws on notices of default and time limits. It is important to “start the clock” as soon as a payment doesn’t arrive on time. Otherwise you are losing money!
The past-due letter sequence
- The reminder. When a debtor falls behind, start with a mild past-due letter, perhaps suggesting he may have forgotten the due date. Include a duplicate invoice stamped “past due.” Give the exact amount owed, including the late fee, and warn that if he does not pay immediately you will have no choice but to proceed with foreclosure (or, for a non-real-estate debt, a collection agency).
- The second letter. If payment doesn’t arrive within a few days, send a more strongly worded letter, still dignified and courteous. The important thing is to demand some kind of response from the debtor.
- The final notice. Your state’s laws will determine the form and timing of later notices. For a consumer debt, send a third letter, very firm but still polite, giving a date on which you will turn the account over to a collection agency. If you haven’t been paid by that date, do it.
No one likes to be on a collection agency’s list. Once your debtors find out that you really will turn accounts over to an outside agency, they’ll quickly accept that you run a “tight ship” and won’t try to use you as a soft touch.
Be consistent in your collection procedures and don’t grant special favors. Set up a regular routine for past-due accounts, then stick with it.
Keep records, too. Unless you have evidence that you tried to collect your bad consumer debts, the IRS will not let you write them off as a business loss.
What every collection letter should include
- The date.
- The debtor’s name and address.
- A description of the goods or services involved.
- The amount due.
- A self-addressed reply envelope, to make it easy to mail a check.
Consider envelopes printed with “Address Correction Requested,” so the post office will give you a forwarding address if the debtor has moved.
In almost all cases, address the letter to a specific person, not to a purchasing department or the company in general. Try to keep up your relationship with the person who authorized the purchase in the first place. Your letters should be firm but reasonable and should leave the debtor a chance to set up a payment schedule or another honorable way out of his financial problems.
Making your letters work
To get results, collection letters should be distinctive. Some companies use special letterhead printed in red ink, which catches the eye better than any other color. Many collection agencies also say that smaller-than-standard paper, and paper that looks and feels expensive, always gets better results.
Never use humor in a collection letter, or the recipient won’t take you seriously. Keep a sense of urgency, but don’t sound angry: serious, yes, angry, no. Recipients tend to mirror the tone of your letters.
Send your letters at planned intervals, about every 10 days to two weeks. When several creditors are on a debtor’s heels, he generally responds fastest to whoever is most insistent.
Phone calls, visits and partial payments
Phone calls work well because they usually catch the slow payer off guard and can get a promise to pay by a certain date. Before you start calling, make sure you know the account thoroughly and have the file in front of you.
You or one of your agents might visit the debtor in person to discuss why he hasn’t paid. If he doesn’t want to talk and orders you off his property, do not argue or try to reason with him. Leave without another word.
If the debtor offers a partial payment, by all means accept it. Start by asking for the whole amount, but be ready to accept whatever he offers and work out a payment schedule from there. If you can’t collect money, try bartering: trade the amount of your bill for something he has that you can use, sell or trade. Take back the merchandise you sold him only as a last resort.
If he claims to have mailed you a check more than a few days ago, long enough for it to have arrived, ask him to stop payment on it and issue a new one. Above all, stay calm, and don’t argue or become threatening.
Stay within the law when you collect
Never defame a debtor in writing. Doing so gives him a chance to sue you for libel. To make sure you stay within your legal rights when collecting a bad debt, keep these rules in mind:
- Deal only with the person responsible for the bill.
- Send collection letters in sealed envelopes so other people can’t read them.
- When you phone, don’t discuss the nature of the call with anyone else.
- Don’t attack the debtor personally, even if what you say is true.
- You may say what your next step will be, such as turning the account over to a collection agency or starting foreclosure, but don’t describe what will happen to the debtor if he doesn’t pay.
Finally, always make it as easy as possible for a debtor to pay. A great many bad debts can be collected, but it takes a planned collection procedure and the tenacity to see it through.
