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Bad Debt

How to approach bad debt during the lockdown

The South African Nation is currently under Lockdown and a big question is how to approach bad debt during the lockdown.

Most businesses have ground to a halt and we are holed up on our homes waiting it out. Although some business can be done remotely, it is safe to say that no-one is running at full capacity at present in terms of input or output.

So how does a company go about chasing debtors in circumstances such as these? From both a moral and practical standpoint, we are facing difficulties. This article will address manners in which to approach the issue and keep face at the same time.

At the moment, the Courts are for the most part closed. The implications from a debt collection standpoint is that one cannot at this time issue any new summonses. The summons is the starting point for the debt collection litigation process and therefore this issue will inevitably cause delay in the entire collection process. What can still be done however, is to pursue the debt up to the point of summons and then just wait out the Lockdown in order to issue summons at the moment the Courts come into operation again.

The soft collection phase and preparation of summons legwork can be done in this time at the very least and will result in less time being wasted than only handing matters over only when Lockdown ends.

It is therefore advisable to companies to hand over bad debtors – especially those that were delinquent before the Lockdown – in this period to ensure that minimal time is wasted in the bigger scheme of things.

Proceeding as indicated above is ideal for debtors that either have defaulted before Lockdown, or regularly default. These debtors are in essence not created by the current circumstance.

How should you deal with debtors that are, as a result of the Lockdown and economic result thereof, now not in a position to settle their account?

Technically, you can still proceed with the soft collection and issue summons as soon as Lockdown is lifted, however this is morally not ideal. We have seen a massive trend of leniency towards debtors by especially the major banks and going in full force against debtors would just not be in the spirit of working together.

Companies cannot however all afford to give payment holidays or afford to write off dues, so what can it do in such circumstances? There are various methods you can use, such as

  1. Ask your debtor to sign an acknowledgement of debt and arrange repayment of the debt in instalments.

This will give the debtor more time to settle the indebtedness but safeguards the creditor’s claim.

Interest and costs of the documentation may be for the debtor’s cost, ensuring that the creditor does not lose out in the long run.

  1. Give discounts for immediate settlement of accounts.

Offer your debtors a discount should they settle their account in full. This will improve your cashflow but will also assist the debtor in improving its cashflow.

  1. Allow debtors to defer a payment or two and repay them over the next month or months.

April will likely be a hard month for all business. If you defer payment of the account for April and allow the debtor to pay same in equal parts in May and June for example, this will improve your debtor’s cashflow, but also does not negate your right to payment.

If you use any of the above mechanisms to assist debtors, make sure that the arrangement is properly formulated and agreed upon in writing. Also bear in mind that April may not be the only hard month, we may face an extension to the Lockdown and there will definitely be knock-on effects of the current Lockdown. It could very well be that your debtor may need more than a month or two reprieve and this must be considered when you decide on how you are able to accommodate debtors.

Please feel free to contact our offices for any assistance with debt collection or advice.

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