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The Year is Ending — Is it commercial to write the debt off?

The year is ending. You are facing many debt collectibles. You are also trying to get on top of your payables. You are now making a plan on how to collect these debts and some debtors may have disputed the amount. What debts do you pursue? What debts do you forget about?

You must consider the following when deciding whether to write off a debt or not:

1. Is it worth spending more time and money chasing this?

When determining whether to pursue or write off a debt, consider the cost in time and money. An outstanding debt is an asset. To convert this asset into cash, all you may need is to send a payment reminder to the debtor. This will not cost you a lot. All you will need to do is call or send an email.

There will be some debts though that will need more than a payment reminder. When this is the case, ask yourself, how much time and money are you willing to spend to pursue payment of this debt? Also ask yourself how much time do you want to spend pursuing such a debt?

2. Is the debtor a valued client?

There are many reasons your client may not be able to pay their debts on time or in full. Your client is also running a business. They could also be in the same situation as you — trying to collect on unpaid debts. Or they could be suffering from other issues such as personal problems, a victim of the bushfires perhaps?

You should never resort to aggressive debt collection efforts. It is best to reach out to your debtor and try to come up with a solution that is a win-win for both you and your debtor. The Slater Byrne team always attempt to find a middle ground and come up with an amicable solution to help recovering the debt.

3. Is the debtor bankrupt/in liquidation?

Debt collection gets more difficult when the debtor is in bankruptcy or in liquidation.  The bankruptcy trustee or administrator will create a priority of creditors. The bankrupt estate will firstly payout government claims, such as unpaid taxes. The bankrupt estate will pay secured creditors, such as banks next. Your debt, which will most likely be an unsecured debt, will be paid last.

Once your debtor is bankrupt, you must stop all informal collection activities. You must allow the court proceedings to take its course. The trustee or administrator will create a payment scheme know as a Creditors Report or a Deed of Company Arrangement. You will need to accept or reject the arrangement. You cannot use other methods to collect the debt owed to you.

4. Is the debt already statute-barred?

Simple contracts have a statute of limitation of six years in most of Australia. It is three years in the Northern Territory. When the debt has already passed the statute of limitations, you can no longer make a claim and take it to court. Or if you pursue the debt in court, your debtor will have a valid defense not to pay it.

Even though statute barred, the debt will remain a debt except in New South Wales. In NSW, the time-barred claim is totally cancelled. You can still pursue a time-barred debt, but you will be limited to only requesting for payment.

What are your options when you choose not to pursue a debt further?

The consequence of writing-off a debt is that you can no longer pursue it. Writing off the debt means deducting the amount from your bottom line. The ATO allows you to ask for a tax deduction for bad debts if you have written evidence. If you are using the accrual method, you can also claim for a refund of the GST paid.