Imagine that you deliver goods, perform a service or lend money to someone, but they don’t pay you back. In most cases, such a situation can always be resolved. Unless it is a bad debt. In that case, recovery is a bit more complicated (euphemistically speaking). Find out more about bad debt, it may concern you too.
An uncollectable debt is a serious problem for a creditor and can have a significant impact on its financial stability. A debtor who cannot or will not repay its obligations creates a situation where the creditor faces a complicated process at the end of which it may not get its money back.
In our next article on bad debt, we will explain what a bad debt is and what legal action you can take regarding bad debt if you find yourself in such a situation. We have also prepared some practical advice on how to avoid the risk of unpaid debt as a precaution. If you are interested in more about the topic of debts, you can read more about what types of debts [a]exist, what a typical priority claim is[b] or how debts can be recovered.
A bad debt is a debt that cannot be recovered either in or out of court. The most common causes are the debtor’s insolvency, death, unsuccessful foreclosure or a situation where the debtor does not have enough assets to cover his debts. To put it in common parlance, if you as a creditor have an uncollectable debt, then someone owes you something. The problem is that you no longer have any way of enforcing your claim on that person, and sometimes even no legal recourse.
There are various situations where a debt can be classified as bad debt:
Each of these situations leads to the claim being classified as uncollectible and the creditor is faced with the question of how to proceed. Does this also apply to you? Then read on to find out what your options are.
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Recovering bad debts requires a systematic approach and knowledge of both legal and accounting aspects. We therefore highly recommend consulting with a lawyer to minimize the risks associated with this process.
As other creditors often do, you can start by filing a lawsuit if the debtor fails to pay you. The court route may not be quick or cheap, but if you are successful, you can obtain a writ of execution. This title is the basis for further recovery, for example through foreclosure. However, since it is a bad debt, there would more or less have to be some loophole that would indicate a violation of the law by the debtor and so on. However, you have to take into account that court proceedings can be time-consuming and costly and do not always lead to success.
If you have a writ of execution, you can ask the bailiff to carry out the execution. The bailiff has the right to seize the debtor’s property, bank accounts or deductions from their salary. However, foreclosure is not always successful. If the debtor does not have sufficient assets or income, the execution may be fruitless and the debt remains uncollectable.
Another option is to open insolvency proceedings against the debtor. If the debtor becomes insolvent, creditors have the right to file their claims in these proceedings. This may result in partial payment of claims, but it may also result in a finding that the debtor is unable to repay.
If you are unable to recover a debt, selling it may be an effective solution. Specialist collection agencies or debt recovery firms will often buy your claim for a lower amount. So even if you don’t get the whole debt back, you can at least partially recoup your loss without engaging in further costly and time-consuming collections.
Another way to reduce your losses is by offsetting your receivables. If you also have a debt to a debtor, you can offset this debt by offsetting your claims against each other. This way, you can help reduce your loss without investing further in collections.
The Czech tax system offers certain options to minimise the financial impact of bad debts. Under certain conditions, a receivable can be written off as a tax deductible expense, which can help to at least partially reduce the financial loss associated with its non-payment. The conditions for a tax deductible write-off of a receivable are usually a qualifying reason (e.g. default by the debtor), a proper valuation of the receivable and the receivable must be uncollectible and not time-barred.
Prevention is key in all areas of life. There is no doubt that it is also the key to protecting against bad debts. There are a number of steps you can take as a creditor to minimise the risk of finding yourself in a situation where a debtor defaults.
Before entering into any contract, first thoroughly check the financial situation of the prospective business partner. There are various credit rating agencies on the market that can also provide you with financial analysis of companies, including information on their liabilities, economic performance and payment record. Similar checks can also be carried out on individuals, for example using public registers.
As a further precautionary step, enter into a contract with clearly defined payment terms, including penalties for non-compliance. If the contract includes provisions for penalties or contractual interest, this will give the debtor more incentive to meet their obligations on time.
As a creditor, you should also seek to ensure that your claim is secured as far as possible. To do this, you can use various forms of security, such as a surety bond, a pledge over real or movable property or, for example, a security promissory note. Such security will significantly increase your chances of recovering the claim even if the debtor gets into financial difficulties.
If the debtor is late with payment, act quickly. Responding quickly by sending a reminder or contacting the debtor could help you avoid long-term problems. By communicating early, you may be able to find an agreement, for example in the form of a payment plan or other solution. A friendly and constructive approach is certainly more successful and effective than confrontation.
Do not underestimate the importance of out-of-court solutions. Out-of-court agreements can often be quicker and cheaper than a court process. In addition, mediation or arbitration can provide an acceptable compromise for both parties.
Finally, regularly check the payment record of your business partners. Even a long-standing, reliable partner can get into financial trouble, and regularly checking their ability to pay can help you avoid future problems.
If you find yourself in a situation where you have a bad debt problem, do not hesitate to contact us. We can help you not only with debt recovery, but also with preventive measures to minimize the risk of bad debts in the future.
[a]prolink when published
[b]link when published
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