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'''Bad Debt Recovery''' is recovered revenues from collections that were originally written off as bad debt (Piland, N.F., Glass, K.P. 1999).
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Bad debts are the debts that are never expected to be realised. It is also called unrealisable or irrecoverable debts.The bad debts should be transferred to the [[Profit]]&Loss Account in the year in which the sale took place to conform to the matching concept otherwise income of the folowing accounting year will be understated. It is treated as a business loss. Bad debts recovery occurs when a bad debt is realised. Often a debt which was considered as bad and written off previosly is recovered afterwards either partly or fully (Chakravarty, S.K. 2002).
BAD DEBT RECOVERY


Every business carries the risk of uncollectible claims. The most significant part occurs in several sectors such as manufacturing sector, trade sector, banking sector, healthcare and others.
==Debt write-off==
In periods of economic crises, the number of companies that get into difficulties increases, which results in losses in business and increased problems in the collection of claims and a greater number of bankruptcies. The most important segment of working capital management in difficult business conditions is the collection of receivables, which should ensure an adequate amount of funds and liquidity. Namely, efficient management of receivables is a prerequisite for timely payment of obligations to employees, suppliers and creditors and the initiation of a new business cycle - procurement of raw materials, goods and others. This is the only way to ensure the creation of new income and business continuity, otherwise quality products/services will be doomed. The establishment of an internal system for continuous checking of the creditworthiness of business partners is a complex process and requires knowledge and the availability of personnel within the company for credit analysis of partners, quality input data, adequate IT support and time.
A delinquent loan becomes a defaulted loan when the chance of recovery becomes minimal. Defaulted loans result in loan write-offs. Write-offs sholud be considered after a certain period of time has passed and the loan has not been repaid. The decision to write off a loan and the timing of doing so are based on the policies of the MFI. Some MFIs choose to write loans off relativly quickly so that their balance sheets do not reflect basically worthless assets. Others choose not to write off loans as long as there is a remote possibility of collecting the loan. Regadless of when write-offs take place it is important that an MFI have an adequate loan loss reserve so that the net value of loans stated on the balance sheet accurately reflects the amount of revenue-generating assets. Once it has been determined that the likelihood of a particular loan being repaid is remote (the borrower has died, left area, or simply will not pay) a write off occurs.
Banking business is specific and different from the business of a non-financial company. The bank, professionally and continuously approving loans as its most important active business, assumes the credit risk, i.e. the risk of non-payment by the debtor. In order to preserve the stability of operations, the bank sometimes applies the strategy of selling risky receivables in order to preserve liquidity and reduce risk in operations. A sudden increase in the share of bad loans can create stagnation and serious difficulties in banking operations, and consequently in the entire economy.
Also, for example the healthcare industry is often plagued by unpaid bills, collection agency fees, and outstanding medical testing costs. All these factors contribute significantly to the rising cost of healthcare. Health care providers often have to treat patients on credit, especially in emergency and trauma cases. Unlike financial institutions health care providers do not collect financial information about their patients. This lack of information makes it difficult to evaluate whether a particular patient-debtor is likely to pay bill. In recent years researchers have started to recognize the potential of data mining methods in improving our understanding of medical bad-debt, but there is relatively little research that examines the effectiveness of data mining methods in classifying bad debt in healthcare.
In an effort to reduce the share of uncollectible debts, institutions and companies take various preventive measures, but also try to collect debts that have already been defined as uncollectible.
Bad debt recovery is a payment received for a debt that was written off and considered uncollectible. The receivable may come in the form of a loan, credit line, or any other accounts receivable. Because it generally generates a loss when it is written off, bad debt recovery usually produces income. In accounting, the bad debt recovery credits the allowance for bad debts or bad debt reserve categories and reduces the accounts receivable category in the books. (By JULIA KAGAN Updated May 23, 2020, Reviewed by THOMAS BROCK)
Debt recovery refers to the process of making people or companies pay the money that they owe to other people or companies, when they not paid back the debt at time that was arranged by two parties (Cambridge school of finance 2016).
The term bad debt refers to an amount of money that a creditor must write off as a result of a default on the part of the debtor. If a creditor has a bad debt on the books, it becomes uncollectible and is recorded as a charge-off., (By ALICIA TUOVILA Updated March 22, 2022,Reviewed by SOMER ANDERSON, Fact checked by KIRSTEN ROHRS SCHMITT)
Many bad debts are difficult to collect and are often written off. In most cases, a company has taken many steps before deeming it a bad debt including in-house and third-party collections or even legal action. Collection efforts may still take place after the debt is written off. Payment can still be made after the debt is written off, making it a bad debt recovery. Payment may come as partial payment from a bankruptcy trustee or because the debtor has decided to take a settlement to clear off the debt at a lower amount. The bad debt may also be recovered if a piece of collateral is sold. Bad debt is inevitable, as companies will always have customers who won't fulfill their financial obligations. That's why there is a high demand for bad debt recovery companies or (third-party) collection agencies. Any action taken with the bad debt must be noted in the company's books. When the debt is written off, it must be accounted for as a loss. If it is recovered, the company must reverse the loss.
So when a business writes off a bad debt in one tax year and recovers some or all of the debt in the following tax year, the tax administration requires the business to include the recovered funds in its gross income. The business only has to report the amount of the recovery equal to the amount it previously deducted. However, if a portion of the deduction does not trigger a reduction in the business's tax bill, the business does not have to report that part of the recovered funds as income.
In some cases, the tax administration allows tax filers to write off non-business bad debts. These debts must be completely not collectible, and the taxpayer must be able to prove he did as much as possible to recover the debt. However, the filer does not have to take the debtor to court. In most cases, showing the debtor is insolvent or has declared bankruptcy is significant proof. If the debt is repaid after it was claimed as a bad debt, the tax filer has to report the recovered funds as income. However, he only needs to report an amount equal to the bad debt deduction that reduced his tax obligation in the year he claimed the bad debt. (By JULIA KAGAN Updated May 23, 2020, Reviewed by THOMAS BROCK)
In the sale of uncollectible receivables, the party that is ready to sell the receivables and the party that is ready to buy the same receivables at a certain purchase price participate. The party buying the receivables usually pays 10-30% of the total value of the receivables. In this way, the party that sells the claim clears the balance sheet of hard-to-collect receivables and obtains liquid funds, while the party that buys creates the possibility of earning in the future after collecting the receivables. In addition to easier access to liquid assets, the sale of bad debts improves cash flow, collection becomes more efficient, and the institutions become more competitive, and it is easier to protect itself from the risk of non-payment. (Žager, Hrvoje Master's thesis, 2021)


Ivana Miškić
'''Write-offs are only an accounting entry.''' They do not mean that loan recovery should not continue to be pursued if it makes economic sence. Writing off a loan does not mean the [[organization]] has relinquished its legal claim to recover the loan. If a loan that was previosly written off is recovered (the borrwer has repaid the loan) then the full amount recovered as revenue (credit) on the income statement. This is because the principal amount write off was recorded as an expense (throught the loan loss provision that created the loan loss reserve) and therefore if recovered it is recorded as revenue and not as a decrease in outstanding loan portfolio (assets) (Ledgerwood, J. 1999).
 
'''Bad Debt Expense''' is acccount used for uncollectible [[accounts receivable]] and notes receivable. It is very important that consistent and justifiable [[method]] of etimating the periodic charge to provision for bad debts should be applied systematically (Piland, N.F., Glass, K.P. 1999).
 
==Debt collecting==
'''Many bed debts are difficult to collect and are often written off.''' In most cases a organizations take many steps before deeming it a bad debt.
The forced collection [[process]] at financial institutions usually involves the activation of security instruments, enforcement documents or promissory notes. When the creditor determines that all activities have been undertaken, but that the collection has not been successful, he can at any time sell the debt to a third party, e.g. a debt collection agency.
 
Collection attempts can continue even after the debt has been written off. Payment can still be made after the debt has been written off, making it a bad debt recovery.
In an effort to reduce the share of uncollectible debts institutions take various preventive measures but also try to collect debts that have already been defined as uncollectible. One way to collect such debts is to hire companies or agencies for the collection of bad debts.
 
'''Preventing bad loans is far better than treating [[bad credit]].'''
Uncollectible loan can be solved by legal and non-legal means. Foreclosure and settlement are illegal strategies for managing bad loans. The main purpose of resolving the loan should be to recover the maximum amount of funds from the borrower. Banks must identify problem accounts and must take prompt [[management]] steps.
When entering into [[compromise]] settlements, banks should keep in mind the return of the maximum loan amount and [[cost]] reduction, the examination of compromise proposals and the establishment of special departments to monitor non-performing loans and their collection (Afrin, S. 2020).
 
==Bad debt in healthcare industry==
Also, for example the healthcare [[industry]] is often plagued by (Shi, D., Zurada, J., Guan, J. 2014):
* unpaid bills
* collection agency fees and
* outstanding medical testing costs.
All these factors contribute significantly to the rising cost of healthcare. Health care providers often have to treat patients on credit, especially in emergency and trauma cases. In recent years researchers have started to recognize the potential of data mining methods in improving our understanding of medical bad-debt, but there is relatively little research that examines the effectiveness of data mining methods in classifying bad debt in healthcare (Shi, D., Zurada, J., Guan, J. 2014).
 
The post bad-debt recovery strategies that are being used by MFIs currently such as recovery from savings or guarantos income, reminders, promise register and legal actions are less result oriented. The findings denoted that pre-debt recovery strategies such as high [[quality]] formal and informal pre-lending [[customer]] screening process, enhancement of skills of the field officers, who's given with the responsibility of assuring the feasibiity of the customer and portfolio tracking after the disbursement of the loan, enhancement of social capital among the group network [[system]] by providing business development services, improving financial literacy of customer '''can make a huge influence of the loan repayments''' which is possibly minimizes the default [[risk]] of non-performing loans (Rajapaksha, K.N.S., Ediriweera, E.A.I.N., Deshika, N.P.T. 2019).
 
{{infobox5|list1={{i5link|a=[[Doubtful account]]}} — {{i5link|a=[[Accounts uncollectible]]}} — {{i5link|a=[[Creative accounting]]}} — {{i5link|a=[[Credit management]]}} — {{i5link|a=[[Bank reference]]}} — {{i5link|a=[[Accounting process]]}} — {{i5link|a=[[Accounting Principles]]}} — {{i5link|a=[[Subsidiary account]]}} — {{i5link|a=[[Loan application]]}} }}
 
==References==
* Afrin, S. (2020), ''The Effect of Non-performing Loans on Performance and Profitability: A Comparative Analysis from Banking Sector of Bangladesh'', International Journal of Science and Business
* Chakravarty, S.K. (2002), ''Fundaments of Accounting for C.A. Professional [[Education]] Course - 1''
* Ledgerwood, J. (1999) ''Sustainable Banking with the Poor, Microfinace Handbook, An Institutional and Financial Perspective'', The [[World Bank]]
* Piland, N.F., Glass, K.P. (1999), ''Chart of Accounts for Health Care Organizations'', Center for Research in Ambulatory Health Care Administration
* Rajapaksha, K.N.S., Ediriweera, E.A.I.N., Deshika, N.P.T. (2019), ''[http://repo.lib.sab.ac.lk:8080/xmlui/handle/123456789/749 A Study on the Impact of Bad Debt Recovery Strategies Used by Micro Finance Institutions: Evidence from Sabaragamuwa Province]'', Sabaragamuwa University of Sri Lanka
* Shi, D., Zurada, J., Guan, J. (2014) ''A Neuro-fuzzy Approach to Bad Debt Recovery in Healthcare'', 47th Hawai International Conference on System Science
* Yong Voon, K., Fook Koo, L. (2015) ''[https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2544987 Analysis of the GST Panel Decision 2014 on claiming Bad Debt Relief]''
* Zurada, J., Lonial, S. (2005), ''[https://www.clutejournals.com/index.php/JABR/article/view/1488 Comparison Of The Performance of Several Dana Mining Methods For Bad Debt Recovery In The Healtcare Industry]'', The Journal of Applied Business Research - Spring (2005), 21(2)
 
{{a|Ivana Miškić}}
[[Category:Economics]]

Latest revision as of 17:02, 17 November 2023

Bad Debt Recovery is recovered revenues from collections that were originally written off as bad debt (Piland, N.F., Glass, K.P. 1999). Bad debts are the debts that are never expected to be realised. It is also called unrealisable or irrecoverable debts.The bad debts should be transferred to the Profit&Loss Account in the year in which the sale took place to conform to the matching concept otherwise income of the folowing accounting year will be understated. It is treated as a business loss. Bad debts recovery occurs when a bad debt is realised. Often a debt which was considered as bad and written off previosly is recovered afterwards either partly or fully (Chakravarty, S.K. 2002).

Debt write-off

A delinquent loan becomes a defaulted loan when the chance of recovery becomes minimal. Defaulted loans result in loan write-offs. Write-offs sholud be considered after a certain period of time has passed and the loan has not been repaid. The decision to write off a loan and the timing of doing so are based on the policies of the MFI. Some MFIs choose to write loans off relativly quickly so that their balance sheets do not reflect basically worthless assets. Others choose not to write off loans as long as there is a remote possibility of collecting the loan. Regadless of when write-offs take place it is important that an MFI have an adequate loan loss reserve so that the net value of loans stated on the balance sheet accurately reflects the amount of revenue-generating assets. Once it has been determined that the likelihood of a particular loan being repaid is remote (the borrower has died, left area, or simply will not pay) a write off occurs.

Write-offs are only an accounting entry. They do not mean that loan recovery should not continue to be pursued if it makes economic sence. Writing off a loan does not mean the organization has relinquished its legal claim to recover the loan. If a loan that was previosly written off is recovered (the borrwer has repaid the loan) then the full amount recovered as revenue (credit) on the income statement. This is because the principal amount write off was recorded as an expense (throught the loan loss provision that created the loan loss reserve) and therefore if recovered it is recorded as revenue and not as a decrease in outstanding loan portfolio (assets) (Ledgerwood, J. 1999).

Bad Debt Expense is acccount used for uncollectible accounts receivable and notes receivable. It is very important that consistent and justifiable method of etimating the periodic charge to provision for bad debts should be applied systematically (Piland, N.F., Glass, K.P. 1999).

Debt collecting

Many bed debts are difficult to collect and are often written off. In most cases a organizations take many steps before deeming it a bad debt. The forced collection process at financial institutions usually involves the activation of security instruments, enforcement documents or promissory notes. When the creditor determines that all activities have been undertaken, but that the collection has not been successful, he can at any time sell the debt to a third party, e.g. a debt collection agency.

Collection attempts can continue even after the debt has been written off. Payment can still be made after the debt has been written off, making it a bad debt recovery. In an effort to reduce the share of uncollectible debts institutions take various preventive measures but also try to collect debts that have already been defined as uncollectible. One way to collect such debts is to hire companies or agencies for the collection of bad debts.

Preventing bad loans is far better than treating bad credit. Uncollectible loan can be solved by legal and non-legal means. Foreclosure and settlement are illegal strategies for managing bad loans. The main purpose of resolving the loan should be to recover the maximum amount of funds from the borrower. Banks must identify problem accounts and must take prompt management steps. When entering into compromise settlements, banks should keep in mind the return of the maximum loan amount and cost reduction, the examination of compromise proposals and the establishment of special departments to monitor non-performing loans and their collection (Afrin, S. 2020).

Bad debt in healthcare industry

Also, for example the healthcare industry is often plagued by (Shi, D., Zurada, J., Guan, J. 2014):

  • unpaid bills
  • collection agency fees and
  • outstanding medical testing costs.

All these factors contribute significantly to the rising cost of healthcare. Health care providers often have to treat patients on credit, especially in emergency and trauma cases. In recent years researchers have started to recognize the potential of data mining methods in improving our understanding of medical bad-debt, but there is relatively little research that examines the effectiveness of data mining methods in classifying bad debt in healthcare (Shi, D., Zurada, J., Guan, J. 2014).

The post bad-debt recovery strategies that are being used by MFIs currently such as recovery from savings or guarantos income, reminders, promise register and legal actions are less result oriented. The findings denoted that pre-debt recovery strategies such as high quality formal and informal pre-lending customer screening process, enhancement of skills of the field officers, who's given with the responsibility of assuring the feasibiity of the customer and portfolio tracking after the disbursement of the loan, enhancement of social capital among the group network system by providing business development services, improving financial literacy of customer can make a huge influence of the loan repayments which is possibly minimizes the default risk of non-performing loans (Rajapaksha, K.N.S., Ediriweera, E.A.I.N., Deshika, N.P.T. 2019).


Bad debt recovery — recommended articles
Doubtful account — Accounts uncollectible — Creative accounting — Credit management — Bank reference — Accounting process — Accounting Principles — Subsidiary account — Loan application

References

Author: Ivana Miškić

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