Should You Report Bad Debt?

By Alyssa Browning

Each of us want to give people the benefit of the doubt, and have compassion for those in a rough spot. However, as business owners we have to make tough decisions. One of the toughest choices is whether or not to report bad debt to creditors. Some facility owners look at delinquent accounts as something to let go because the unit can now be rented, and auctions can get some of your money back. On the other hand some owners believe it is important to hold tenants accountable. The answer will likely vary from person to person and business to business.

For those of you who would rather not report credit after the fact (or those of you who want to save yourself a headache) you can preemptively rid your facility of subpar tenants by doing a credit check as a condition of tenancy. This tool can be extremely helpful and save you the hassle and headache of collections in the future. However, it is always important to check your state’s laws to ensure you are in compliance.

Furthermore, keep in mind that reporting debt to credit bureaus won’t be free. You will likely need software to upload information to the credit bureau. In addition, the bureau will charge you a fee to actually collect. A key element to determining if it is worth sending an account to collections should be comparing the amount you will receive back on the unit and the cost you will be charged to collect. If the amount owed on the account is significantly more than you will be charged it might make sense to move forward with collecting on an account. A benefit of knowing that you will be reporting bad credit is forewarning your customers. If they know the threat to their credit is there they are more likely to pay which means fewer delinquent accounts for you!

Another option is simply “ignoring” or “forgiving” the debt. By forgiving the debt of a tenant you may open up tax breaks for your business. In addition, you can file it as “cancelled debt” with the IRS. The IRS can then count it as taxable income against the tenant. More information on “cancelled debt” can be found here.

At the end of the day the choice is yours. There are pros and cons to reporting bad debt to creditors. The most important thing is to follow your state laws, and do what is best for your business. Good luck!

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