Recovering Bad Debts – Legal Experience and Practical Solutions

Jun 20

1. Defining “Bad Debts” and “Unrecoverable Debts”

Bad debts are overdue receivables for more than 6 months, despite the creditor having taken multiple reminders or collection efforts without success. These may involve debtors who have gone missing, filed for bankruptcy, or dissolved their businesses.

Unrecoverable debts are debts that have been overdue for an extended period, and the debtor is confirmed to be bankrupt, dissolved, missing, or the debt has already been fully provisioned (100%) but still cannot be collected.

2. Setting Up Provisions – A Proactive Financial Tool

Enterprises must establish debt provisions according to aging categories:

30% provision for debts overdue from 6–12 months
50% for 12–24 months
70% for 24–36 months
100% for debts over 36 months

Note: Even if the debt is not yet due, if the debtor is bankrupt, missing, or under criminal prosecution, the business may establish provisions based on expected loss.

3. Financial Processing of Unrecoverable Debts

After provisioning 100% but still failing to recover the debt:

Determine actual financial loss (difference between book value and actual recovery).
Use the provisioned fund to offset the loss; any shortfall must be recorded as a business expense.
These amounts must be clearly tracked and disclosed in the financial statements for at least 10 years from the date of write-off.

4. Legal Action for Debt Recovery

When written demands fail:

Draft a debt recovery lawsuit petition, including relevant contracts, documents, IDs, and debt reconciliation records.
Submit the petition via one of three methods: in-person at the court, by post, or online via the Court Portal.
The court will process the case, issue a ruling, and proceed to enforcement if a legally binding judgment is issued.

5. Practical Advice from Legal Experts

Monitor and categorize receivables regularly to prevent debts from becoming irrecoverable.
Send official demand letters with delivery confirmation to establish legal evidence.
Fully provision expected bad debts to protect financial health and enable proper tax reporting.
Combine negotiation, tax pressure, and legal action to maximize the likelihood of recovery.
For large debts, it is advisable to hire a reputable law firm with strong legal expertise and effective collection mechanisms.

Contact DEDICA Law Firm today for expert legal advice!

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