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When Is a Debt Uncollectable?

A lot of small businesses decide not to turn over past-due accounts to a lawyer or a collection agency until they've exhausted all the means at their disposal to collect the accounts. But how do you know when you've reached that point? When does a debt become uncollectable?

Here are some guidelines you can use for determining when a past-due account should be turned over to a lawyer or a collection agency (assuming you want to take that step):

• If the customer tells you he or she has no intention of paying the debt and you can't do anything about the "why" (for example, the customer won't give you a reason why), you've reached the point where you need to turn the account over.
• Skip tracing: if the customer disappears or ceases doing business, you still have an option left: hire a professional skip-tracer. If the skip-trace turns up nothing or turns up information that leads you to believe the account is uncollectable, you should turn it over.
• Bankruptcy: if the customer declares bankruptcy, you have to stop your collection efforts. You should at this point discuss your options with a lawyer.
• If the customer gives you the appearance of wanting to work with you, but never seems to come across with any money, your decision is more difficult. The best way to approach it is to place a deadline on collecting. For example, you could decide to turn over to a lawyer or a collection agency any account more than 120 days old (for guidelines on determining which one to turn it over to, see paying lawyers and debt collectors).
• If the customer is one of those people who pays you just enough of the debt to keep you off of his back, but who never gets around to paying you in full, you have another difficult decision. On the one hand, if you turn the account over, the customer may stop paying you anything. But on the other hand, unless you turn it over, you're probably never going to be paid in full. One way to approach this problem is, once again, to place a deadline on collecting, but this time to make it a bit more generous than in the previous example. In these cases, you could decide to turn over to a lawyer or a collection agency any account that hasn't been paid in full for more than 160 days (for guidelines on determining which one to turn it over to, see paying lawyers and debt collectors).