Writing off a bad debt

Writing a loan off takes it off the balance sheet. It does not cancel the debt. The customer still owes every cent, you may still collect, and anything you recover is income.

So a write-off here does two things at once. It closes the loan against the provision you have been building, and it opens a salvage account carrying the surviving legal claim. The loan leaves your book; the claim does not leave your system.

Before you can write a loan off

Two things must be true.

• The loan is in Stage 3. The Write Off button appears on the Provision panel once the loan is credit-impaired. If arrears have not aged it there yet, and you know it is gone anyway, use Pin Stage first — see bad debt provisioning.
• The product is set up for write-off. Your organisation configures which balances a write-off clears. If that is missing, the system refuses the write-off rather than closing a loan and clearing nothing.

Write-off usually needs a second approver. See countersign.

What you see before you commit

Select Write Off. Before you confirm anything, the dialog shows you the arithmetic:

Your approver sees these same figures, captured when you raised the request — not whatever the balances have drifted to by the time they look.

What happens when you confirm

flowchart TD
    A[Reverse interest in suspense] --> B[True the provision up to what is written off]
    B --> C[Clear every balance against the provision]
    C --> D[Close the loan as a bad debt write-off]
    D --> E[Open the salvage account with the full claim]
    E --> F[Move the customer's payment references across]

Two points matter for the numbers.

• Suspended interest is reversed, never released. Income you never really earned is never booked.
• Only the true-up touches impairment expense. If you were already fully provided, the write-off costs your income statement nothing. If you were under-provided, the shortfall books as a provision movement, so the expense is attributed to provisioning rather than hidden inside the write-off.

A worked example

Alex owes Woodgrove Bank 1,100 on a loan that has stopped paying: 700 of principal, 300 in arrears, and 100 of interest charged. Of that interest, 60 sits in suspense, because the loan went to Stage 3 before it was paid. Nothing has been provided against the loan yet.

The dialog shows:

On confirmation:

1. The 60 of suspended interest reverses. Interest never counted as income is now not owed to income either.
2. The provision is raised by 1,040 — the 1,100 owed, less the 60 just reversed. That 1,040 is the whole cost to the income statement.
3. The 300 arrears, the remaining 40 of interest, and the 700 of principal all clear against the provision. Nothing is left.
4. The loan closes.
5. A salvage account opens carrying a claim of 1,100 — the full contractual debt, including the 60 you just reversed. Alex still owes it.

The claim is deliberately larger than the amount that hit your expense line. The write-off is an accounting judgment about recovery. The claim is what a court would say Alex owes.

The salvage account

The salvage account is a real account you can open, search, and act on. It sits outside your balance sheet — the claim is recorded as a memorandum, so it never inflates your assets.

What it does, and does not, do:

• It accrues no interest. The claim stops growing on its own.
• It can grow by recovery costs. Legal fees and tracing costs charged to recovering this debt add to the claim.
• Receipts reduce it, and count as income. Money that arrives is bad-debt recovery income in the period you receive it. It does not reverse the original write-off.
• It keeps the customer’s payment references. Any matching rules from the written-off loan move across, so a customer who keeps paying the old reference lands on the salvage account without anyone intervening.

The Salvage Claim panel shows the claim, the status, the account it came from, and the prescription dates below.

When the claim expires

A debt does not last forever. The claim carries a limitation period, and the panel shows two dates:

The clock does not start at write-off. It starts at the customer’s last payment, which is usually well before you wrote the loan off. Dating it from the write-off would overstate how long you may still collect.

Two things restart it:

• A payment. Any receipt on the claim interrupts the period and resets the baseline.
• An acknowledgement. Select Acknowledge Debt when the customer admits the debt in writing, and record the date they did so.

Once the claim prescribes, the status changes on its own at end of day and the account hardens: you cannot add fees and you cannot record an acknowledgement. A prescribed debt cannot be revived. If the customer chooses to pay anyway, the payment is still accepted and still recovery income.

Giving up on a claim

When a claim is worthless — prescribed, the estate is wound up, tracing has failed — select Abandon Claim. The claim is extinguished, the account closes, and the reason stays on the record. Like write-off, this usually needs a second approver.

Abandoning is a decision, not a cleanup task. A claim you abandon is one you have decided never to collect, and the audit trail says who decided that and when.

What your organisation configures

• Which balances a write-off clears, and in what order — per product. Each balance is cleared by its own transaction, so your general ledger shows principal, arrears, and interest separately.
• Whether a product opens a salvage account at all. A product configured without one simply derecognises, and no claim is tracked.
• The limitation period, and the balance it runs on. Three years is the South African default for these claims; your jurisdiction may differ.
• Where recoveries land in the general ledger — the recovery income account and the memorandum pair behind the claim.

Small, tidy-up write-offs are a different thing entirely. A few cents left on a closing account are swept away by a de-minimis rule, with no provision and no salvage claim.