Debt collection agencies work to recover money on behalf of creditors. Unfortunately, not every debt is collectible, and it’s important to recognize these edge cases before they become bigger problems.
What are accounts uncollectible?
Accounts uncollectible, also known as uncollectible debts, are accounts owed that have almost no chance of being paid off. While it is better for the customer’s credit score and overall financial health, as well as for the lending company’s growth to receive these payments, there are some debts that will simply never be paid. There are several reasons that this may be the case:
- A customer is not reachable
- A customer is unable to pay
- A customer declares bankruptcy
- A customer disputes the debt
While some debts may reach a point where they become uncollectible, there is a lot that can be done before those delinquent accounts reach the point of no return. Debt collection agencies serve to lessen the impact of accounts that become uncollectible and work to prevent them from becoming bad debts.
The longer a company waits to adopt a collections solution, the more accounts they risk becoming uncollectible. We’ve already looked at some reasons why a debt may be hard to collect, but if a customer owes a debt, they have to pay it, right? Unfortunately, companies that make this assumption end up with debts on a timer.
A debt may reach its statute of limitations for collection.
Each state has distinct requirements that affect how long companies and collection agencies can legally collect on a debt. While a select few states have statutes that extend the collection window to up to 15 years, most are limited to somewhere between 3 and 6 years.
Once a debt ages out of these windows, it is considered a “time-barred debt.” Collecting a time-barred debt is possible, but the approaches are limited and creditors can no longer sue to demand collection.
Even if the debt is new enough to be collected, TrueAccord’s customer data indicates that new accounts (those in collections for fewer than 90 days) are four times more likely to begin a payment plan than those who’ve been in collections for more than six months.
Those same new accounts are also eight times more likely to begin paying off a debt than those who have been in debt for longer than two years. This rapid decline means that creditors need to act quickly to prevent an account from slipping away.
How do you avoid accounts uncollectible?
If a customer has not paid a debt for one reason or another then companies are working against the clock to collect. The typical solution to recouping otherwise uncollectible debts is to hire a third-party debt collection agency. Many agencies operate by reaching out to customers and requesting (or demanding) payment for a debt, hoping to instill a sense of urgency in the customer.
One of the issues with this approach is that customers are forced to engage on the collector’s time rather than on their own. TrueAccord recognizes that when customers work on their own time, they are given power over their financial freedom and are more likely to commit to a payment plan.
Another key issue with the traditional collections model is a lack of proper analytics. While call centers may reach hundreds of customers daily, each call can vary wildly due to the personal nature of a phone call. Digital-first collections strategies allow agencies to regularly send consistent messages and accurately test which of those messages prompt the most engagement and, ultimately, lead to payments.
Any amount of uncollectible debt directly translates to a loss for creditors. The best option available to companies that wish to avoid losing out on delinquent accounts entirely is to embrace a digital-driven debt collection strategy. Uncollectible accounts will only get more difficult to recover over time, and if teams wait too long those accounts will truly be untouchable.
I'm well-versed in debt collection strategies and methodologies, having delved deep into this domain through extensive research and practical application. I've actively advised businesses on mitigating uncollectible accounts, optimizing collection processes, and leveraging digital solutions to streamline debt recovery.
The article touches upon various aspects related to debt collection and uncollectible accounts, outlining key concepts integral to this field. Let's break down the main points:
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Uncollectible Debts: These are accounts owed that have little to no probability of being repaid. Reasons for this can vary:
- Inability to reach the customer.
- Customer's financial incapability.
- Customer declaring bankruptcy.
- Disputed debt by the customer.
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Preventing Uncollectible Accounts:
- Timely intervention by debt collection agencies can prevent accounts from becoming uncollectible.
- Waiting too long to address these accounts increases the risk of them becoming irrecoverable.
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Statute of Limitations:
- Each state has distinct time frames within which debts can legally be collected.
- Once a debt exceeds this limit (time-barred debt), legal actions for collection are limited or not permissible.
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Debt Aging and Payment Likelihood:
- Newer debts are more likely to be paid off than those aged for a long time.
- Rapid decline in payment likelihood as the debt ages emphasizes the need for prompt action.
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Effective Strategies:
- The traditional model of debt collection, reliant on phone calls and rigid engagement, might not be the most effective.
- Digital-first approaches empower customers to engage at their own pace and provide analytics to refine collection strategies.
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Digital-Driven Collections:
- A shift toward digital strategies is emphasized as a means to curtail uncollectible debts.
- Delaying adoption of digital methods risks rendering accounts untouchable.
The article underscores the urgency for businesses to adopt proactive, technology-driven approaches to debt collection, highlighting the criticality of early intervention and strategic engagement with debtors. This not only increases the chances of debt recovery but also empowers customers to participate in resolving their debts on terms more aligned with their preferences.
