Susan Rickard

When should I write off a receivable as a bad debt? Is it worth taking the customer to court?

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4 Answers

Brad Lyons

Brad Lyons , Consultant at SMS Fusion

In some cases it can be worth taking the matter to court, it just comes down to legal viability of the account.

It isn't just a matter of taking a customer to court because you want them to pay. You should only take a customer to court if you know they have the ability to pay the debt. If a customer has assets that could be used to help recover the debt or an income that would support a garnishee then yes.

A lot of people tend to take customers to court expecting the customer to just pay because a judge told them to. That isn't what happens in a lot of cases. You need to be prepared to take it further and recover the funds via garnishee or sale of assets.

If the courts order an arrangement to pay of the debt is to be setup and the customer misses payments, then the customer is in contempt of court and they could get 3 months imprisonment for that. (For contempt of court not the debt). A garnishee is commonly avoided by people changing employers after the garnishee is setup. So you need to be prepared to follow through.

Best advise would be to contact the customer, negotiate an arrangement to pay off the debt and explain to them if they avoid payment you will have to look at litigation and legal fees will be added to the outstanding amount. That tends to motivate them to pay.

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George Grimekis CPA

George Grimekis CPA , Accountant at Alpha Omega Accounting & Business Solutions

Hi Susan,

Please google TR 92/18 and pay particular attention to Paragraph 31 (e). The answer to your question is found within this ruling.

Before going to court, you would issue a letter of demand to notify them that you will proceed with legal action of the debt remains unpaid. You would then submit a statement of claim to the local court to commence proceedings. It's worthwhile speaking to your legal representative and seeing whether the cost of chasing the debt outweighs the debt itself.

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HUNTER LEONARD

HUNTER LEONARD , FOUNDER AND CEO at BLUE FROG MARKETING PTY LTD

Hi Susan

I'd say no, unless the outstanding money is significant. My experience is that you'll end up spending way more money, and still not get the debt paid.

Best to just move on, and put in place policies to reduce the risk of it happening again.

One possible way to force the person to pay up (and provided you've done whatever you promised to do in exchange for that money) is to threaten public naming and shaming of the individual/company.

Sometimes the threat of public visibility of their poor credit or payment behaviour can have more weight than a legal threat.

Something to consider.

Hope this helps

Hunter

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Jeremy Carter

Jeremy Carter , CEO | Leadership Trainer | Management Consultant | Business at Rapport Leadership Australia

Get yourself a good debt collector and have documented credit policies for your company. That way it's not you having to make the decision, it's just the company policy. Debt collectors have reasonable success at chasing debts providing they are not too old.

IMHO it's better for you to focus on bringing new business in rather than burning time and money with solicitors and losing focus on your business. Take the learning and move forward, if providing credit, always ask for a signed account application and directors guarantee and charge interest on late payments. The only purpose of 'interest' is to keep people interested in repaying the money they owe you.

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