Debt Collection Strategies to Deal with Bad Debt in Debt Collection

Introduction

While global debt reached a peak of $315 trillion by 2024, there’s a specific type of debt that isn’t everyone’s cup of tea. The chances of retrieving such a debt have been concluded to be nearly impossible. Such a debt is termed bad debt and is as bad as it sounds.

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Whether you’re dealing with individual-based collections or B2B debt recoveries, the main agenda of all these ventures is to make sure the debt at hand is collected. The same, however, can’t be said for users dealing with bad debt since a debt is declared to be bad debt when all available resources have been exhausted, and the debtor still refuses to pay either due to economic losses such as bankruptcy, business collapsing or due to any other personal reasons. Either way, the bottom line is that although things may seem like you aren’t going to get paid and will have to write off the bad debt, there are specific bad debt collection strategies that you can implement to boost your chances of recovering bad debt across all industries. If this sounds like something you might be dealing with, join CollectCo at Sub Summit 2024 to see how our industry expertise can help you recover all your bad debt.

What Exactly Is Bad Debt?

Although on paper, the concept of bad debt might seem like a finance cheat code since if such a debt exists, wouldn’t everyone start doing it? And while bad debt can severely impact the creditor’s cash flow and restrain specific resources, the debtors aren’t safe from the repercussions of such bad debt either. While these repercussions aren’t generally related to the creditors, they can still use these points in their negotiations to better convince the debtors to repay the pending debt. Some of the consequences the debtors might have to face when dealing with bad debt are as follows:

Credit Score Impact

Bad debt will impact the user’s credit score and make it harder to apply for future loans or credit cards.

Unable To Secure Loans

If the customer has bad debt, creditors will label them as a “high-risk borrower.” This will give them more rejections than usual on any loans they apply for.

Debt Collection Anxiety

The thought of having bad debt will constantly be on their minds; at least, the constant reminders and notifications from the creditors won’t let them forget about it. However, this will eventually lead to more stress and anxiety, as 40% of the debtors have reported higher anxieties.

Asset Seizure

If things keep escalating, the debtors may end up confiscating any assets from the debtors to satisfy the bad debt they own.

Litigation Issues

In non-payment, creditors may be forced to take legal action against debtors to recover or settle the bad debt.

How Can Debt Collectors Deal with Bad Debt?

From the collector’s perspective, tackling bad debt may seem like an extensive period of exhausting available resources. However, there are still many available options and strategies that, when implemented correctly, can significantly enhance your chances of bad debt collection.

Screening and Vetting Processes for Bad Debt

The first step in lending someone debt is to ensure they have a satisfactory track record of managing such financial dealings. For instance, if the user has a history of late payments, continuous bad debt instances, or even minor compliance issues, chances are this is something you should look into further. Since bad debt already intends to damage your cash flow, screening and vetting will give you a clearer picture of whether to get involved with such a user. If the business decides to deal with such customers, the assessment done beforehand will allow them to prioritize such accounts for bad debt collection.

Cordial Negotiations and Settlement in Bad Debt Collection

As bad debt involves users that have decided not to pay their outstanding dues due to whatever reason, the last thing you need to do is mess up the negotiations, as after settlements and negotiations, there’s a probability of the debtor settling for 40-60% of the initial debt. Because let’s face it, at the end of the day, some money is better than no money, especially when it comes to bad debt collection. One of the best bad debt collection strategies is to opt for settlements when things don’t seem to go anywhere.

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The first step when initiating any negotiation is to document everything since having the bad debt written somewhere can help you visualize the history of the client you’re dealing with. Therefore, when undergoing negotiations and potential settlements, the company can better assess the user and how much debt they can recover. This helps them avoid pushing boundaries and losing their leverage in bad debt collection.

Personalized Bad Debt Payment Plans

Let’s say you have exhausted all the available options. You have contacted the debtor multiple times and sent numerous reminders in the hope of recovering bad debt, yet things don’t seem to be going anywhere. Instead of focusing on the already presented pricing plans, negotiating with custom-made payment plans will significantly increase your chances of getting the debtor on board for recovering bad debt. Bad debt is recovered quickly through such plans because of the customer segmentation and the basis of open dialogues brought along with it. Therefore, the customer feels secure in knowing that the collectors are willing to listen and negotiate during troubling times.

Why User-Centric Reminders Work for Bad Debt

Instead of sending the same automated messages reminding the users about their bad debts and the potential consequences they may have, one of the more widely used debt resolutions for effective debt collection involves custom-made messages that can increase your chances of recovering from the bad debt.

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The reason for this is that since the users are instilled with confidence and a sense of comfort through user-centric reminders, this enables them to be more flexible when dealing with collectors regarding their pending debt invoices. Also, collectors can use this opportunity to better understand their customers and figure out exactly why the users are dealing with bad debt to foster positive relationships and communicate their pricing plans more efficiently to formulate proactive bad debt collection solutions.

How Credit Assessment Can Help You Recover Bad Debt

With Americans alone having a credit card debt of around $1.08 Trillion, it’s safe to assume that doing a credit check on the users can very well lead to predicting bad debt, reducing the probability of having write-offs in the financial sheet. Credit assessment of an individual or a company involves an overview of the respective entity’s credit history regarding previous transactions, financial health, and ability to repay any upcoming bad debt. This gives creditors a general idea of when and how the pending invoices will be recovered, and they can integrate such data into their bad debt collection strategies.

Can Credit Assessment Predict Bad Debt?

While the idea of predicting debt might seem a bit farfetched, especially in the case of predicting bad debt, which would essentially eliminate the chances of any unpaid invoices in general, businesses and firms around the world have been using debt predictive models to better prepare themselves when dealing with accounts receivable. One of the critical aspects of such predictive models is the creditworthiness of the entity in question, which is the same as the credit assessment discussed above. These models work by averaging the probability of when and how these debtors have previously paid their debts, transactions they have made, assets they do or don’t own, and other monetary information. Based on such data, creditors can better assess and predict how their bad debt will pan out in upcoming communications. While these strategies will help you increase your odds of recovering bad debt so that your cash flow, as well as business revenue, does not take a hit, most of the users are shifting their focus towards collection platforms, such as CollectCo, that already has the relevant experience in bad debt collection as well as AR management that can provide proactive solutions on the go thanks to their automated debt collection operations. If you’re dealing with bad debt or want to get rid of it quickly, head to CollectCo today!