When attempting to collect on past-due accounts, there are numerous laws to be aware of, each of which varies depending on the state and industry. Whenever a legitimate and due obligation is not collected after all reasonable debt collection efforts have been exhausted, the invoice should be written off.
The writing off of invoices that are not due (for example, products that have not been delivered) is discouraged, as this requires the creation of a credit memo that can then be applied to the outstanding invoice.
It is necessary to enter the invoice reference data, the balance due, and the rationale for writing off the balance due on a customer invoice in writing using Credit Control’s Write-off form if a department desires to write-off a customer invoice. Afterwards, it must be signed by the Head of Department (or delegated authority) and forwarded to Credit Control, who will make the following adjustments to UFS if the request is granted:
The Head of Department must give approval before a debtor can be written off with debts up to £10,000.
Debtors who owe between £10,000 and £25,000 in debt must have their debts written off by the Director of Finance, who must provide approval.
Debtors who owe more than £25,000 will have their debts forgiven by the Finance Committee.
If an invoice is written off that was subject to VAT, Credit Control notifies the Taxation Section because the VAT may be able to be reclaimed. Taxation Section will post an adjusting journal into the general ledger when relevant, utilizing the cost center and source of funds from the original sale, but with the transaction code FJNB to distinguish it from the original transaction.
Debt Forgiveness and Suspension of Debts
Permanent Write-Offs are a type of financial loss that cannot be recovered. In order to qualify for a permanent write-off, the following criteria must be met:
- The amount is $500 or less, and there has been no payment activity for more than one year on the account.
- There has been no payment activity for more than two years, and the balance is larger than $500.
- On compassionate grounds, a ministerial request has been made to halt collection activity.
- The debtor would be subjected to undue hardship if the loan were to be repaid.
When the Collections Unit receives approval for a permanent write-off, the debt is removed from the Recoveries System and no longer exists. The debt has been removed from the client’s list of outstanding debts.
Suspension Debts are taken into consideration for suspension when they are paid in full.
- Not meet any of the requirements for a permanent write-off.
- Due to a brief financial crisis, collection has been postponed until further notice.
Because the obligation remains as part of the debtor’s outstanding balance and may be collected in the future, a person who has a debt that has been suspended is not informed that their debt has been canceled. A suspended debt is not actively sought for collection; nonetheless, it may become subject to collection if the client’s file is reopened (by auto-deduction) or if their financial circumstances change during the suspension period.