Tips for Determining How Long to Hold Onto Your Delinquent Accounts

A few years back when the economy was better, it was quite common for credit managers and loan officers to hold on to their delinquent accounts for up to six months trying to work out a payment plan with their debtors.

In fact, it made economic sense to hold on to delinquent accounts for as long as possible, because once an account was turned over to an attorney, the monies spent on attorney’s fees were rarely recouped.

However, our bad economy has brought the credit professional a new problem to deal with. That is the problem of holding on to delinquent accounts so long that the debtor ends up going out of business or filing for bankruptcy, leaving the creditor with nothing.

Knowing that exact timeframe for turning a delinquent account over to an attorney is not easy. However, we have found that if you learn how to interpret information provided to you by your debtor, and if you know how to recognize certain signs you are receiving, you will be able to make the correct decision every time.

The first “red flag” to look for is a defensive or angry attitude by the debtor to your collection calls. When individuals are in financial distress, they are frustrated and angry and usually are feeling helpless. When such individuals receive collection calls, they frequently lash out at the creditor and may even become verbally abusive.

If your debtor is reacting in this manner to your calls, you are most likely not the only creditor calling him and this should put you on notice that the clock may be running out on his business.

Next, if your debtor is never available to take your calls, or never returns your calls when you leave a message, you are being given a sign of a business in trouble. Frequently, when a business is in trouble, and there are many creditors calling, the owner will give the employees orders not to put any collection calls through to him. He also will not return any of those calls.

A general rule of thumb, is that if by the third call you have not gotten through, you had better forget about the calls and turn the matter over to counsel for more persuasive collection efforts which your debtor will not be able to dodge.

Another “red flag” to alert credit professionals of a problem, is payment with post-dated checks. This indicates a business with little or no working capital.

Such a business is in a very fragile state because it is dependent on being paid by its customers before it can pay its creditors. All it takes is for one of your debtor’s customers not to pay, for the whole house of cards to come tumbling down. If you are being paid with post-dated checks, you are being given a sure fire sign of trouble. In such a situation, it is best to turn over the matter swiftly to an attorney so that you have the opportunity to collect something before the business goes under, which it most assuredly will.

When attempting to negotiate payment terms on a delinquent account, it is quite common for credit professionals to seek to reevaluate the financial situation of a debtor. In order to properly reevaluate a debtor’s financial status, debtors are usually asked to release financial data.

If you have made this request to your debtor, and the debtor is delaying the release of this information or if your debtor is flatly refusing to release the information, you are being given a sign of a problem. Pay attention to this sign. Your debtor has such serious financial problems, that he doesn’t even want you to see the severity of the problem.

If you are faced with this situation, we suggest you reconsider the voluntary payment plan and move on to swifter and more secure methods of repayment with legal counsel.

A more subtle sign of trouble is frequent management changes. Such changes are typically the sign of an unstable business. If the business was doing well, management generally would not be leaving, or would not be forced out.

This is a situation where your sales staff can really come in handy. Since they are the ones actually visiting your debtor in person, they would have the most information about such management changes. It is important to alert your sales staff to look for such changes and to report back to you if they see this occurring.

If you learn to recognize the signs a debtor is giving you, you will be able to effectively judge how long to hold on to a delinquent account and when it makes sense to turn it over to counsel. In turn, your collections will be maximized, because you will lessen the number of debtors that go out of business before you have undertaken serious collection efforts. Happy sign watching!