A bad debt is a monetary amount owed by a person to a creditor that is now irrecoverable from that person who was supposed to pay the same. The reason for nonpayment by the debtors is that either they go bankrupt, have financial problems or collection by the creditors due to various reasons is not possible. For example – X Limited sells goods on retail to a retailer at 60 days credit.
After 60 days, the company realizes that the debtors have gone bankrupt and now recovery of money is not possible. Thus, where the recovery of money lent seems impossible, it is considered as a bad debt.
Recovery of Bad Debt
Sometimes a debtor whose account had earlier been written off by a creditor as a bad debt may decide to make a payment either wholly or partly, this is called recovery of bad debts. Since it is considered as a loss when it is written off, recovery of bad debts is an income for the creditor and is recorded on the credit side of the income statement. Bad debts can also be recovered from the sale of borrower’s collateral. For instance – X limited sells its goods to Y limited on credit basis.
Later they find out that Y limited is being liquidated and the possibilities of recovering it’s (X’s) dues are very less, hence they write off their receivables. However, the person assigned to oversee the liquidation of Y limited instructs to pay 50% of the total amount in full settlement of its dues. Therefore, the recovery of money is 50%.
Letter Before Action
A Letter before Action (LBA) is a formal letter sent to the debtor by creditor or creditor’s authorized agent, requesting him to pay his debt before commencing any legal action against him. This letter serves as a final reminder and it includes all the necessary information like the date on which the debt was to be paid, any interest that is to be paid etc. Thus, this is a final warning to the debtor to avoid any legal proceedings.
How to recover my bad debts when the debtor becomes insolvent?
Insolvency is a situation when an individual or an organization is unable to meet its financial obligations with its lenders. In legal terms, it is a situation when a firm’s or person’s liabilities exceed their assets and they fail to pay their debt on the due date.
There are various methods for the recovery of money which are earlier written off. Some of the methods are listed below:
How to Recover My Bad Debt from an Insolvent Person?
The insolvency laws in India are provided under a statute called the Provincial Insolvency Act, 1920. It protects the insolvent debtors from being harassed by the creditors whose claim they fail to meet. The statute also provides machinery for the satisfaction of creditors.
The central rule to deal with the insolvency of debtors is derived from the Roman Principle “cessio bonorum” where a debtor voluntarily surrenders his goods to the creditors in lieu of exemption from court proceedings.
If debtors fail to pay their debts, an insolvency petition can be presented before the court by the debtor or creditor. An insolvency petition can be preferred only when the debt amount exceeds five hundred rupees. When an insolvency petition is presented by the debtor, it is considered as an act of insolvency and court may make an order of adjudication where his property may be attached and used to fulfill the debts which are due by him.
The creditor can also file an insolvency petition. However, it must be filed within three months from the act of insolvency.
The insolvency petition can be filed in the district court which exercises jurisdiction over the area where the debtor resides or carries on business or personally works for gain. The order of discharge by the court releases the insolvent from all current and provable debts. Once the person is declared an insolvent, the court appoints an official administrator to oversee the liquidation, take charge on the property of the insolvent and then divide them among the creditors to pay back their debts.
How to Recover My Bad Debt through Alternative Dispute Resolution Methods?
One of the most convenient method of recovery of bad debt is mediation. Mediators are trained professionals appointed to settle the matter between the creditors and the debtors. The mediator is completely neutral and tries to understand each party’s position. He focuses on the issue and then tries to find a solution that suits both the parties. This is a faster process as compared to courtroom litigation and a mediator can be arranged within a day if both the parties agree to resolve their issues through mediation.
How to Recover My Bad Debt? – Debt Collection Agency
The problem of recovery of bad debt can also be solved by contacting a debt collecting agency. These agencies specialize in the recovery of bad debts. Outsourcing of debt collection helps the creditors to save their own time and lay focus on their business. The debt collecting agencies contacts the debtors via phone, emails, notice and other legitimate mediums, in order to recover the debts of their clients. After all amicable methods are exhausted, they may issue legal proceedings against debtors on behalf of the creditors.
In addition to legal proceedings under The Provisional Insolvency Act, 1920, mediation and debt recovery agencies are viable options which can be relied on to recover bad debts. Mediation is a comparatively faster and cheaper option which must be preferred before initiating legal proceedings. This will help the parties save both, time and money. Where it seems that reaching a settlement between the parties is impossible, the parties can always initiate legal proceedings.