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How Much Bad Debt Do You Really Have?

posted on 2018-03-12 by Dennis Falletti


It seems like a straightforward enough question. Any receivables manager should be able to answer it with a quick glance at a report or two. Unfortunately, the number at the bottom of the page is a lot like the tip of the iceberg. It’s what you don’t yet see that may end up doing the most damage.

Tightening up requirements

You’d be hard pressed to find a company not taking a long hard look at their credit and collection policies, and for obvious reasons. Shorter terms, lower balances, additional and more thorough credit references are just a few areas we’ve all tightened up on the front end. Working accounts sooner, with a more uniform and accelerated escalation process is becoming a new doctrine for collection managers on the back end. So if we’ve tightened up requirements on the front end, and we’ve taken in some slack we previously extended to our slow payers, where should we look now? Even the most diligent credit manager or analyst would be hard pressed to consistently and accurately read the future. Your best customer two years ago could very well be succumbing to the same financial hardships so many others have. And, unlike the one time, hit-and-run customer, your instincts will likely be to extend some leniency their way if they do slide a little. Unfortunately, the slide could be more rapid than anyone expects. So instead of relying on a credit application from ten years ago and a previously solid payment history, why not take an additional step to protect your interests?

Annual credit risk assessments

An annual credit risk assessment of your active customers can provide insight and allow you to make more informed and appropriate decisions based on their current financial health. Some clients run a complete portfolio analysis for all customers annually and even run their “B” and “C” tiers of customers quarterly. On more than one occasion, the trending information they’ve received has allowed them to probe a bit further before green lighting a large order. And in some cases, the order size or terms can now be adjusted to reflect the updated potential risk factors. Accessing the various databases and information needed to come up with useful results would likely be cost prohibitive for most companies to do themselves. However, in some cases, the cost of programs such as these can be zero. More often than not, the results of a credit risk assessment hold at least a surprise or two.

Inside the Bitcoin Debt Crisis

posted on 2018-03-12 by Mikaela Parrick


When the bitcoin bubble bursts, there will be quite a few investors in debt. According to Cointelegraph, about 22% of bitcoin investors used borrowed money to purchase bitcoin. People are even taking out mortgages to buy bitcoin, in addition to using credit cards and equity lines. This means there’s a lot of people accumulating a lot of “bad debt.” Bitcoin is still so new and unregulated that these individuals are taking huge risks to invest, hoping to strike it rich. Many people, including the founder of another popular cryptocurrency dogecoin, are predicting the bitcoin bubble to burst… and soon. So when the value of bitcoin tanks, there will be massive amounts of debt left behind. Some are even drawing parallels to the 2008 housing crisis because people took on huge amounts of debt with the expectation that the housing marketing would boom, only for the bubble to burst. People were left with too much debt and not enough assets to cover it.

What is bad debt?

Bad debt is debt that doesn’t increase your net worth, has no future value and that you don’t have money to back for. Some examples of bad debt are auto loans and credit cards. Good debt is considered an investment that generates long-term income or value.

How much debt is too much?

While any amount of debt is too much, there is an easy way to find out if your amount of debt is too high. A good metric to use is your debt-to-income ratio. To find this, add up all your monthly debt payments and divide that by your monthly gross income. Anything over a 43% debt-to-income ratio is a red flag to potential lenders. Learn more about bad debt here.

Can I invest in bitcoin without going into debt?

Yes! Here are a few words of advice to those interested in investing in bitcoin:

1. Buy only what you can afford

To prevent going into bitcoin debt, first we suggest only buying what you can afford. A good rule of thumb is that if you have to borrow, or you can’t buy the same thing twice, you can’t afford it.

2. Start with a small share

Bitcoin can be purchased in fractions for a cheaper price. Start small before spending all your hard-earned money.

3. Do your research

Bitcoin might not even be the smartest cryptocurrency to invest in. There’s a host of other options available, most of which are currently doing well. Research some other (possibly cheaper) options, like ethereum or litecoin.

4. Buy insured bitcoin

Insured bitcoin can be bought through Coinbase, which is better than uninsured. However, keep in mind that only 2% of Coinbase bitcoin is insured. Always read the fine print!

5. Buy low, sell high

Similar to the stock market mindset, to survive in bitcoin you’ll need to buy low and sell high. We realize this advice is a little too late, considering bitcoin was $500 a few years ago and is now in the tens of thousands, but it’s still good advice to follow nonetheless. This is where the gamble comes in. You never know when the price will fall or shoot back up, so prepare for anything.

6. Stay up-to-date on the market

If you’ve invested in bitcoin or any other cryptocurrency, you need to watch the value like a hawk and sell if you see the market start to tank.

Resolving A/R Disputes

posted on 2018-03-12 by Don Leviton


What can be done to help resolve disputes and invoicing problems before they become collection issues? Sorting out legitimate disputes from those purely designed to avoid payment can be a challenge. By implementing several preemptive practices, you may be able to reduce both. Consistent follow-up with the buyer before the account comes due has long been recognized as a key to heading off problems before they develop into disputes that delay payment. Call the buyer when the goods should have arrived; ask if the shipment was received timely, if the quality is satisfactory, if your invoice is clear and correct. In addition to alerting you to any potential problems, these customer service contacts also serve to remind the buyer of his obligation. He also becomes aware that you are following his account and will take quick action to assure payment. [ Related: From the Desk of Attorney Don Leviton: Proven Strategies for Improving Collection Rates ] Requiring written purchase orders should also become part of your sales policy if your goal is to reduce problems and disputes. Having the details of the purchase in written form goes a long way toward helping to determine whether or not a customer has a legitimate complaint. These documents provide protection for both buyer and seller, and eliminate the error, misunderstanding and loss of confidence that often results when orders and their details are left to verbal agreement. Items such as price, quantity, terms of sale and warranties should all be clearly agreed upon and stated in the purchase order. Once received it is important that the purchase order be reviewed for errors or ambiguities. If these are resolved early on, problems can be avoided later on ensuring the cash flow process is uninterrupted. The following are specific account management steps that can be taken to reduce disputes: Set a policy that requires all disputes to be resolved within two business days. Work with billing to ensure that the invoices that are mailed are correct, effectively eliminating much of the dispute issue. Email the customer to find out if there are any discrepancies – before the due date of the invoice. Fax a copy of the statement to the payables person at those accounts where disputes occur frequently. Do this prior to the due date of the invoice. Call customers 10 days after large invoices have been mailed to identify potential disputes and get them resolved before the due date. Exchange invoice information with comments on all major accounts. Mail quarterly statements to help resolve small disputes and keep them from growing into a large amount. This information is provided as a matter of information and education only. It is not intended to provide legal advice or counsel. Do not take action in specific cases without full knowledge of the facts, and competent legal advice from your attorney.

Proven Strategies for Improving Collection Rates

posted on 2018-03-12 by Don Leviton


Taking a few safeguards can improve your success when collecting on your receivables. I have found that basic strategies are usually the most effective. In order to increase the effectiveness of your collection process, you should: 1. Have a written credit policyand follow it on a consistent basis. 2. Know your customer. Is your customer an individual, a sole proprietor, a partnership, or a corporation? Businesses often use fictitious names and acronyms for their businesses. It is important to clearly establish who is responsible for the obligation. 3. Plan for collection problems before they happen. Your credit agreement or application should provide for provisions for attorney’s fees, interest at the highest rate allowable and late charges for a delinquent account. In order to recover attorney’s fees, most courts require a written agreement signed by an authorized representative of the customer. 4. Use personal guarantees, especially when you are dealing with new companies that do not have a credit history and will try to escape personal liability by creating a corporate account. 5. Have a detailed credit application. All of the above, and more, should be contained in a comprehensive credit application 6. Obtain a security agreementthat can be used to create a lien on the equipment or merchandise sold to protect you in the event of a default or bankruptcy filing. 7. Keep all correspondence between you and your customer. Letters or emails received from your customers may admit the liability in question. Phone conversations should be followed up with a letter or email confirming the conversation. A letter or email received from your customer that you do not agree with should be responded to delineating the reasons for the dispute. Most importantly, once an account is in dispute and the customer has defaulted you must act quickly. The age of the account will be one of the main factors that will impact your ability to be able to collect. Statistics show that 90 days after the account is past due, you have less than a 75% chance of collecting it. The percentage quickly shrinks every passing month and after 12 months, there is only a 25% possibility of collection. [ Related: 8 Things to Expect From Your Collection Agency ] It is essential that accounts are closely monitored during the first three months of aging and an evaluation should be made without delay whether an account should be sent out for collection. Almost always, debtors will ask and creditors will afford a debtor a final opportunity to remit, hopeful that payment will be received the next day, or next week, or next month. This tactic is used by all debtors. Your most effective tool is acting promptly. The strategies discussed above will assist you in managing your accounts receivable and provide for increased collection success if and when the account is sent out for collection. Information in this article is provided as a matter of information and education only. It is not intended to provide legal advice or counsel. Do not take action in specific cases without full knowledge of the facts, and competent legal advice from your attorney.

Settling a Lawsuit

posted on 2018-03-12 by Don Leviton


So you find yourself in a lawsuit. You sued someone, or you got sued; it really doesn’t matter. You’re spending money or, if you’re involved as an injured party in a suit for damages, you are waiting for the compensation for your injuries. Regardless, you’re stuck in a time-consuming and less-than-pleasant process that may be costing you lots of money, and there is no certainty about the outcome. Maybe you’ll win, maybe you won’t; and, even if you win, you could really lose, given the money you’ve spent, the time you’ve wasted and the opportunities you’ve lost. All in all, not a good situation! Lawsuits cannot always be avoided, but opportunities to resolve them without a trial are always present. Federal and state courts provide vehicles for forcing litigants into mediation, where a reputable third party—a judge or someone skilled in mediating disputes—simply uses his or her skills to help the parties reach common ground. The mediator or settlement judge cannot force a settlement, but he or she can force the parties to engage in the process. Not every case will settle, but the opportunity to settle is always present, so long as the litigants are willing to consider risk, cost and time. Similar opportunities to settle before a suit is filed are also present. [ Related: Proven Strategies for Improving Collection Rates ] After almost 30 years of litigating and settling cases, I find the attorney-client relationship most severely tested when we discuss a possible settlement. “Whose side are you on?” “She’s not getting anything from me until some judge forces me to pay.” “Are you scared about trying my case?” I’ve heard all of these comments, and more, and often in the same conversation that includes questions like: “Why is this costing so much?” “When will this be over?” and “Can’t we get a continuance; I really want to join my family for our vacation?” Your attorney is on your side, but he or she would be a lousy advocate if the issue of settlement was not explored thoroughly. The settlement process provides several advantages. First, a settled case is a case that ends the monthly billing cycle for you. (The corollary, often lost, is the fact that a case that an unsettled case usually generates more fees for your attorney). Second, every case—and I mean every one—has its flaws! Rare is the case that isn’t better settled and resolved now. Finally, even when the settlement process does not result in a settlement, you and your attorney will surely gain insights into the other side’s case and you’ll often get a “free look” at what an experienced decision-maker thinks about yours. Before he went to work for the federal government in 1861, Abraham Lincoln was a very accomplished attorney. He also wrote a little about a variety of subjects, including the art of lawyering. About resolving disputes, he offered the following thoughts: “Discourage litigation. Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often a real loser—in fees, expenses, and waste of time. As a peacemaker, the lawyer has a superior opportunity of being a good man. There will still be business enough.” Interesting, in these words, is the fact that some 150 years ago, people involved with the litigation process were concerned about the same issues: cost, time and energy! There was no professional class of mediators in the 19th century, and court rules did not mandate participation in settlement conferences, but the rationale for resolving disputes without having a judge or jury impose a resolution on the parties was present then, just as it is now. Ah, but what about emotions? Lawsuits are not simply about money; they also involve righting wrongs and vindication. Sure, and attorneys appreciate the emotional aspects of your litigation experience! Not getting “your day in court” can be a very unsatisfactory outcome. In some cases, a trial may be the only satisfactory approach. But, and this is important, that “day in court,” when it occurs, can also result in a very unsatisfactory and costly outcome, and that outcome may occur long after you have processed and resolved the emotional issues. What’s the bottom-line takeaway? There are two: First, always give the notion of settling due consideration. Second, recognize the fact that by raising the prospects for engaging in the settlement process, your attorney has focused on your best interests, and not on his or hers. Information in this article is provided as a matter of information and education only. It is not intended to provide legal advice or counsel. Do not take action in specific cases without full knowledge of the facts, and competent legal advice from your attorney.

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