Dealing with Bad Debt
You thought you had been so careful and so very prudent; then a Customer, who seems so trustworthy, stiffs you on a bad check or a delinquent accounts receivable. Unfortunately this occurrence is a part of doing business. As we get close to the end of the year, we will be forced to write off the debt. While we may be forgiving the debt—we don’t have to forget.
One of the easiest ways to track debts year after year is to create a schedule for an account balance that will be zero. When writing off the receivable, make two more entries to a new account number, one with the control number of the “bad” Customer and the other to a “holding” account number; I used the year when the debt was written off. Create a detail-forward schedule and you have a simple record of every bad debt you’ve had to absorb. Example:
| Control # | Name on Account | Balance |
|---|---|---|
| 2016 | Bad Debt 2016 | -$2,500.00 |
| 135623 | Honest ABE Plumbing | +$1,000.00 |
| 234141 | Honey Boo Boo Jones | +$1,500.00 |
This paid off for me when several years after we’d written off a “dead beat” Parts Customer and had cut him off from future purchases (even cash ones). He came to buy a part, a part only we had. We easily knew how much it would cost him to buy this part: the old balance, plus the new part. End of story—he paid both.
To reduce bad debt expenses, for your Parts and Wholesale Vehicle Receivable Customers you should have on file credit applications that show the owner’s information and contains pertinent information including SS# or EIN, just in case you have to go to small claims court or report the write-off to the IRS.
If the amount of the debt exceeds $600.00, the IRS requires the creditor to report to the IRS the amount of the write-off on Form 1099-C. Try sending a demand letter and include that you will be submitting a 1099-C to the IRS if the debt remains uncollected at the end of the year (see the last paragraph for additional items to include). From the IRS standpoint, you must show that a bad debt is indeed uncollectible. You should save copies of your demand letter and other documentation showing you’ve tried to collect on the debt. Small claims court is an option for collection on smaller amounts, depending on your state. You won’t need an attorney to file or represent you in court and the filing fees are as little as $40 to submit the paperwork. The process is quick and all you need is adequate proof that you are owed the money. (Make sure someone always signs for those parts invoices.)
If you have done all that you can do, consider a collection agency. They are pricy—usually 25% - 50%, but if you were getting nothing, 50% is a good deal. Plus some of these guys are good. Twenty years ago when I first went to work at a Dodge Dealership in Virginia, there was a 10-month-old contract in transit for $14,000. The contract hadn’t been cashed because the Customer had no insurance and had moved quickly—payment-free. I turned it over to a skip tracing company and one week later they found the car in West Virginia at a campground. (They had gone through the in-laws’ trash and located them.)
In closing, if you're unable to collect money owed to you, consider contacting the credit bureaus. They'll provide you with the means necessary to make the bad debt part of your Customer’s credit record. While that may seem like little comfort, it may offer valuable leverage years later when a lender refuses the “evildoer” a loan because of the bad debt. That may prompt your less-than-reliable Customer to make good on what's owed you to clear up the credit report.
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