Financial institutions by nature take on a risk when issuing a loan, but most of the time this risk pays off when the borrower pays back the loan plus interest. In fact, loans like these, whether they are mortgages, a business loan or other type of loan, are an important part of the economy in Tennessee. However, when a borrower fails to pay back the loan, it is necessary for the lender to take steps to recover the debt.
For example, if a loan isn't paid back, the financial institution may be able to write off the loan, classifying it as a bad debt. Basically, through a write-off, the financial institution will claim the unpaid loan as an uncollectable loss when it files its taxes. This type of tactic lowers the financial institution's earnings, which in turn lowers the financial institution's overall tax liability. That being said, even if a financial institution writes off a debt, it can still take steps to collect on it. A write-off is just saying that the financial institution has not yet been able to collect on the debt.
Sometimes, if a financial institution writes off a debt, it may utilize the services of a collection agency to collect on the debt. The financial institution can either hire the collection agency to take steps to collect on the unpaid debt for the financial institution's benefit or the financial institution will simply sell the unpaid debt to the collection agency.
While most people pay back their loans, there are times when a debtor can't or won't meet their financial obligations. When this happens, it becomes necessary for the financial institution to take steps to recover the debt. By utilizing the right strategies, financial institutions can handle unpaid debt in a manner that ultimately benefits them.
Source: smallbusiness.chron.com, "What Happens When a Bank Writes Off a Bad Debt?," accessed Oct. 1, 2017