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When Is a Debt Uncollectible?

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Sometimes small business owners have to face a painful fact: You'll probably have some uncollectable debts. See which debts you're better off writing off.

Many 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 uncollectible?

These guidelines can help you determine 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.
  • 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 uncollectible, you should turn it over.
  • 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.


Skip-tracing is the process of tracking down someone who owes you money. When an individual "skips out," he or she generally moves away to another city, to another state, or to another country. When a corporation skips out, it generally ceases to exist.

Determining When to Skip-Trace

You should consider running a skip-trace as soon as you see any sign that the debtor may have disappeared, such as your mail being returned or the debtor's phone being disconnected.

Finding a Skip-Tracer

To find a professional skip-tracer, Google "skip tracing" or "private investigators" for your geographic area. It'll cost you about $30 per skip-trace, so don't skip-trace an account unless the dollar value is high enough above that figure to justify the trouble. The skip-tracer will ask you for any identifying information you have, so be prepared to provide as much as you can.


In some cases, a skip can be unintentional, such as where someone moves and forgets to tell you. To save yourself the cost of an unnecessary skip-trace, consider doing some minimal skip-tracing yourself. If it's an individual you're after, check (most skips travel no more than 100 miles away) or in voter registration records (they have to be kept up to date so a person cannot vote twice). If it's a corporation, check building permits and industry associations.

Finding Corporate and Individual Debtors

Contrary to what you might think, finding an individual is usually easier than finding a corporation. Individuals will almost always leave a trail of records wherever they go. They'll inevitably use credit cards or ATM cards again, or they'll take out a loan or register to vote. You can almost always catch them.

But corporations are a different story because a person can dissolve a corporation one day and reappear in a new corporate form almost the next day. Because the old corporation no longer exists, your only hope is to be able either to go after the individual or individuals behind the old corporation, or to go after the new corporation with the argument that the new corporation and the old corporation are one and the same (called, in legal circles, "piercing the corporate veil"). 

Incorporation laws, however, are specifically designed to provide protection to the individuals behind the scenes, so it won't be easy. If you run a skip-trace, and you discover that the individuals behind the old corporation have reappeared under a new name, contact your attorney and discuss your options with him or her.


If a corporation dissolves, it has to file a document with the state affirming that it has paid all its debts. If the corporation still owes you money, that statement is obviously untrue. When discussing your options with your attorney, ask him or her about the possibility of contacting your state attorney general to pursue this option.


A debtor may hide from you, he may stonewall you, he may run from you, but he can never escape the fact that he owes you money—unless he declares bankruptcy. Debt collectors take the threat of bankruptcy seriously because it can have such powerful consequences. The laws give the federal bankruptcy courts the right to wipe away your customer's debt to you in one stroke of the pen.

There a few things, however, you should know about bankruptcy, before one of your customers threatens you with it to get you to stop your collection efforts.

Types of Bankruptcy Relief

The first is called straight, or Chapter 7, bankruptcy. In straight bankruptcy, the debtor is seeking to have all or most of his debts wiped clean. He is, in effect, telling the court, "Here are my assets. Give what I have to my creditors, then wipe the slate clean so I can start over." The debtor in straight bankruptcy is allowed to keep a few of his or her assets, such as a house and some belongings.

The second type is called reorganization, or Chapter 11 bankruptcy (Chapter 13, for individuals who want to reorganize). In this case, the debtor is attempting to have the court take control of his or her finances and to work with all the creditors to formulate a repayment plan. The plan will allow the debtor to continue in business while the debts are being repaid. Your chances of collecting from the debtor are better in Chapter 11 or Chapter 13 than in Chapter 7.

Once Your Debtor Has Declared Bankruptcy

Once you discover that your customer has filed for bankruptcy, you must stop all your collection efforts. At this point, you should contact your lawyer. Have the lawyer file a proof of claim with the court on your behalf. And any payments you've received within the last 90 days of the bankruptcy may have to be returned to the bankruptcy estate.

The best protection you can have against someone going into bankruptcy is to have collateral for your debt. If you have collateral for your debt, you are considered to be a "secured creditor." In bankruptcy, secured creditors are paid before unsecured creditors. In fact, statistics indicate that the average secured creditor receives about 77 cents on the dollar, while the average unsecured creditor receives only about 2 cents. So you're much better off if you have collateral.

The final thing you need to know is that debtors love to use the threat of bankruptcy to thwart collection efforts. While you need to take any such threat seriously, you shouldn't automatically knuckle under to it. Unless you are one of the debtor's major creditors, your debt is unlikely to be the reason why he declares bankruptcy.

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