Differentiating Debt Recovery and Debt Collection

Legal CounselAt first look, the terms ‘debt recovery’ and ‘debt collection’ sound awfully similar. They basically translate to “pursuing debtors and encouraging them to settle their obligations” if taken literally. But in fact, they constitute two different meanings. Much of the variations are on more legal terms, as well.

Debt Recovery In A Nutshell

According to Investopedia, debt recovery (in this case, bad debt recovery) refers to business debt involving three main factors: a credit line, loan, or accounts receivable. Such debt is recovered either entirely or in part after being written off as bad debt. In other words, it involves an entity (often a corporate one such as a company) being able to collect payment that’s previously considered as bad debt.

There is a lot of legalese involved with debt recovery. Typically aided by a debt recovery legal counsel, a company is taken into a labyrinth of financial agreements with another. It goes like this: a certain company (Company A) sells $1 million worth of products to 10 different customers. Company A records the same amount in revenue and writes it down on the income statement, as well as in its accounts receivable on the balance sheet, assuming that the customers are given 60 days to pay.

One of Company A’s customers is failing. In this case, it’s often another company (Company B). Company B eventually fails at paying bills, and doesn’t pay Company A for a specific amount in goods previously purchased. For this example, assume that the amount is $100,000. Since Company B is in apparent financial trouble, Company A isn’t confident that the latter will ever be able to pay and classifies the remaining $100,000 as bad debt. The former then hires an agency to recover what Company B owes, and if successful, it’s classified as a bad debt recovery.

That’s where debt collection and debt recovery diverge. The former merely involves ‘polite’ reminders sent to a debtor, like phone calls, reminder statements, and collection letters. On the other hand, the latter serves as a last resort option to aid debt collection — as a way of recovering debts once they’ve been recorded in accounts at the end of the fiscal year. Since it can be tough to recover these debts, it requires legal action to have a good chance at succeeding; hence, the involvement of specialist lawyers.