Default Loading for Bad Debts
DEFAULT LOADING
WHAT IS IT?
In New Zealand we have a number of credit reporting databases (the main being Veda Advantage – formerly Baycorp) that are used by creditors to check to see if they should give or continue giving credit to their customers.
When one of your customers defaults on their payment you can have that information loaded to the customers credit record with the reporting agency. Once a default is loaded, it will appear on that customer’s credit report showing other creditors of your customers failure to pay. Clearly such a failure will influence the probability of the customer being able to obtain credit.
WHY USE IT?
The advantages of loading the default are: It may trigger getting your debt paid:
In order to restore or improve their credit record, your customer will have to pay the defaulted amount.
It is a clear consequence of non payment.
It will appear for up to 6 years on the credit report.
HOW DO YOU USE IT?
Most credit reporting agencies provide easy access for you to load and maintain defaults. You have 2 options:
You open an account with the credit reporting agency and load and maintain the defaults yourself. You will need to ensure you meet both the agencies requirements and those of the Credit Reporting Code.
You use a pre-approved third party, such as Debtworks, to load and maintain the defaults.
WHEN DO YOU USE IT?
The purpose of any credit management process is to ensure that payment is received in a timely manner. Any alteration or addition to your credit management process should be measured against that question; will it increase the likelihood of timely payment?
It is in effect a two step process; firstly while you have no obligation to warn anyone that you will load a default (only that you have taken steps to recover the amount) you can use the threat of the default loading to try and encourage payment. If that is unsuccessful you can then load the default and advise your customer. That advice to your customer may also encourage payment. Because of the nature of the default we suggest that they are employed later in the credit management process.
Similarly notifying your customer that the default has been loaded also has an advantage, as it conveys a clear consequence of the failure to pay.
The other points that you need to consider are the costs, and feasibility. Is it feasible to include the process into your current credit management process, or are you better served by having it as part of your third party debt collection process.
WHAT ARE THE PITFALLS?
Disadvantages of loading the default include:
Maintaining the default - Default loading is only part of the process. Not only must you load the default, you also must maintain/update it to ensure it is accurate. It is usually this second obligation that takes the most time and is the main cost. This means you have a continuing obligation to notify the credit reporting agency of payments.
Credit Reporting code - Before you are able to lodge a default you must comply with conditions of the Credit Reporting Privacy Code 2004 which requires that you must have taken steps to recover the amount outstanding and that the account is over 30 days old.
Fitting in with your credit policy - how will default loading sit with your overall credit policy
Fitting to your other company policies –You may have other policies or considerations that will impact on using it as a credit tool.
Barrier to payment – Although most credit providers are experienced at reading defaults in some cases your default may hinder your customers ability to borrow to settle your account.
This article was provided by Debtworks (NZ) Limited. It is a general guide only and not intended as detailed professional advice. For more information about this or any related topic please contact David Young (david@debtworks.co.nz) or visit www.debtworks.co.nz