How to manage a doubtful debt

What is doubtful debt?

  We have already given the definition of the term “doubtful debt” in ourglossarybut it may perhaps be helpful to go a step farther down that road. This classification is in fact useful for accountancy and, ultimately, for tax reasons. The doubtful debt is a due andcertaindebt, that is, it has its origin in a debt that is real andliquid, which is to say, for which an amount of money has been defined; however, itsrecovery is uncertain. In other words, thecreditorhas delivered the product or service ordered by thedebtor, he has drawn up and sent theinvoice, but thinks that his chances of receiving payment within a reasonable period of time (by the due date or perhaps somewhat later) are slender at best. He then categorizes that debt as “doubtful”.   Thereasonsfor which payment seems at risk may be many and various:  

• The most obvious reason is when paymentbecomes overdue for an unreasonable period of timewithout a word of explanation. This may, of course, result from an as yet unknown dispute or from a temporary or permanent lack of solvency affecting the debtor or may be caused by one or another problem or even bad faith. At this stage, however, this remains nebulous because the debtor is not communicating.

• When there is anobjectionthat the creditoraccepts; he quickly makes out a total or partial credit note and whatever debt may be left over is then no longer “doubtful”.

• If, however, the objection isunjustifiedin the opinion of the creditor, the latter may then take the view that the discussion, or the actual proceedings, will seriously delay the payment or even cancel it once and for all. He will meanwhile categorize such debt as “doubtful”.

• If the cause of non-payment is theinsolvencyof the debtor or any other problem that makes payment uncertain, the creditor will again categorize the debt as “doubtful”.

• If the debt claim islost, for example because of the bankruptcy of the debtor or, after failure of every reasonable effort to obtain the payment, it is withdrawn from “doubtful” debts and filed under lost debts.

    As you can see, there arethree stages:  

• A “normal”debt (payment is expected within the agreed time limits … or thereabouts);

• A“doubtful”debt (payment seems unlikely, but there is still hope);

• A“lost”,“dead”or“written-off”loan (payment is no longer expected and the debt is nownon-recoverable, which does not prevent its remaining due to the creditor subject to a possible court order, etc.).

What to do about doubtful debt

  Seriously though, what are you going to do if you’re faced with a debt and a debtor that gives real cause for concern?   The management of doubtful debts can be split intoseveral stages:  

• Confirmation of the doubtful character of the debt

For adebtto be considereddoubtful, you will have to explain why there is a greater risk of that debt never being paid. For example, an objection that is difficult to defend (lost order form, debtor’s whereabouts unknown, no progress despite repeated reminders, etc.)  

• Tax treatment of probable loss

  Once you have confirmed the doubtfulness of the debt it’s time to estimate theprobable loss(the loss for a so-called “non-recoverable” debt isfinal) in connection with a doubtful debt. This estimate must be calculated on the amount of the debt and be made in accordance with the accountancy principle of due diligence, care and attention, honesty and good faith.

Example

The creditor estimates that he is set to lose 40% of his debt claim of €100. The probable loss on the debt is therefore €40. It should be noted, by the same token, that this means that the creditor also expects to be able to recover 60% of his debt claim.

  This evaluation is made per debt claim (even if it could be operated automatically to some extent, based on certain criteria). These debt claims may therefore be the object of areduction of valuefor the estimated amounts per debt claim (as the €40 in the example above). This value reduction is operated over the financial year during which the doubtful character of the debt is established. It will reduce the return and, thus, also the tax paid by the creditor for the financial year in question. This value reduction will of course have to be cancelled if payment is made.  

• Resolution of doubtful debt

  The creditor will of course try to make arrangement for theamicable recoveryof his debt by sending aletter of reminderor atelephone call-backor even by making ahome visit to the debtor. This value reduction described above will of course have to becancelledif payment is made. In certain cases, however, thedoubtful debtislostonce and for all. The accounting documents will then reflect the new situation. The loss will be written up in the accounts for closure (although a payment might still be forthcoming, which would generate a new set of accounting documents). Plus which, the VAT may also be recovered if a debt becomes finally lost.  Note: when a debt claim is processed byTCMand, unfortunately, either cannot be recovered at all or only in part, TCM issues acertificate of non-recoverability(for the unpaid part). To this day, and for more than 20 years now, the tax office hasalwaysaccepted these certificates as sufficient proof of non-recoverability.    

“Prevention better than cure”

  The purpose of these classifications and the associated accountancy processing is to recover unpaid taxes on sales that in the end failed to produce the expected return (due to non-payment). But, as the old saw so neatly puts it, the best way to deal with doubtful debt is toprevent itin the first place. How? By checking thesolvencyof your new client or supplier when you’re about to embark on a new business venture. There are various means at your disposal. You can find them in our articlehttps://tcm.be/en/how-to-check-solvency-client-business/. We recommend that you read it if you need more information on the subject.   As you may imagine, the management and recovery of doubtful debts in Belgium is no straightforward matter. If you would like us to assist you in the recovery of your debt claims you can always contact us bye-mailatsales@tcm.beor bytelephoneon +32 16 74 52 04.  

How to manage a doubtful debt

What is doubtful debt?

  We have already given the definition of the term “doubtful debt” in ourglossarybut it may perhaps be helpful to go a step farther down that road. This classification is in fact useful for accountancy and, ultimately, for tax reasons. The doubtful debt is a due andcertaindebt, that is, it has its origin in a debt that is real andliquid, which is to say, for which an amount of money has been defined; however, itsrecovery is uncertain. In other words, thecreditorhas delivered the product or service ordered by thedebtor, he has drawn up and sent theinvoice, but thinks that his chances of receiving payment within a reasonable period of time (by the due date or perhaps somewhat later) are slender at best. He then categorizes that debt as “doubtful”.   Thereasonsfor which payment seems at risk may be many and various:  

• The most obvious reason is when paymentbecomes overdue for an unreasonable period of timewithout a word of explanation. This may, of course, result from an as yet unknown dispute or from a temporary or permanent lack of solvency affecting the debtor or may be caused by one or another problem or even bad faith. At this stage, however, this remains nebulous because the debtor is not communicating.

• When there is anobjectionthat the creditoraccepts; he quickly makes out a total or partial credit note and whatever debt may be left over is then no longer “doubtful”.

• If, however, the objection isunjustifiedin the opinion of the creditor, the latter may then take the view that the discussion, or the actual proceedings, will seriously delay the payment or even cancel it once and for all. He will meanwhile categorize such debt as “doubtful”.

• If the cause of non-payment is theinsolvencyof the debtor or any other problem that makes payment uncertain, the creditor will again categorize the debt as “doubtful”.

• If the debt claim islost, for example because of the bankruptcy of the debtor or, after failure of every reasonable effort to obtain the payment, it is withdrawn from “doubtful” debts and filed under lost debts.

    As you can see, there arethree stages:  

• A “normal”debt (payment is expected within the agreed time limits … or thereabouts);

• A“doubtful”debt (payment seems unlikely, but there is still hope);

• A“lost”,“dead”or“written-off”loan (payment is no longer expected and the debt is nownon-recoverable, which does not prevent its remaining due to the creditor subject to a possible court order, etc.).

What to do about doubtful debt

  Seriously though, what are you going to do if you’re faced with a debt and a debtor that gives real cause for concern?   The management of doubtful debts can be split intoseveral stages:  

• Confirmation of the doubtful character of the debt

For adebtto be considereddoubtful, you will have to explain why there is a greater risk of that debt never being paid. For example, an objection that is difficult to defend (lost order form, debtor’s whereabouts unknown, no progress despite repeated reminders, etc.)  

• Tax treatment of probable loss

  Once you have confirmed the doubtfulness of the debt it’s time to estimate theprobable loss(the loss for a so-called “non-recoverable” debt isfinal) in connection with a doubtful debt. This estimate must be calculated on the amount of the debt and be made in accordance with the accountancy principle of due diligence, care and attention, honesty and good faith.

Example

The creditor estimates that he is set to lose 40% of his debt claim of €100. The probable loss on the debt is therefore €40. It should be noted, by the same token, that this means that the creditor also expects to be able to recover 60% of his debt claim.

  This evaluation is made per debt claim (even if it could be operated automatically to some extent, based on certain criteria). These debt claims may therefore be the object of areduction of valuefor the estimated amounts per debt claim (as the €40 in the example above). This value reduction is operated over the financial year during which the doubtful character of the debt is established. It will reduce the return and, thus, also the tax paid by the creditor for the financial year in question. This value reduction will of course have to be cancelled if payment is made.  

• Resolution of doubtful debt

  The creditor will of course try to make arrangement for theamicable recoveryof his debt by sending aletter of reminderor atelephone call-backor even by making ahome visit to the debtor. This value reduction described above will of course have to becancelledif payment is made. In certain cases, however, thedoubtful debtislostonce and for all. The accounting documents will then reflect the new situation. The loss will be written up in the accounts for closure (although a payment might still be forthcoming, which would generate a new set of accounting documents). Plus which, the VAT may also be recovered if a debt becomes finally lost.  Note: when a debt claim is processed byTCMand, unfortunately, either cannot be recovered at all or only in part, TCM issues acertificate of non-recoverability(for the unpaid part). To this day, and for more than 20 years now, the tax office hasalwaysaccepted these certificates as sufficient proof of non-recoverability.    

“Prevention better than cure”

  The purpose of these classifications and the associated accountancy processing is to recover unpaid taxes on sales that in the end failed to produce the expected return (due to non-payment). But, as the old saw so neatly puts it, the best way to deal with doubtful debt is toprevent itin the first place. How? By checking thesolvencyof your new client or supplier when you’re about to embark on a new business venture. There are various means at your disposal. You can find them in our articlehttps://tcm.be/en/how-to-check-solvency-client-business/. We recommend that you read it if you need more information on the subject.   As you may imagine, the management and recovery of doubtful debts in Belgium is no straightforward matter. If you would like us to assist you in the recovery of your debt claims you can always contact us bye-mailatsales@tcm.beor bytelephoneon +32 16 74 52 04.