You are on page 1of 3

Bad Debt (Can Become) An Asset!

Shaking conventional wisdom that bad debt is an expense, a loss of value, is a realization that
bad debt can with some preparation, timing and approaches become an asset. Bad debt asets
can be realized upon, sold and used to bring positive effects to the balance sheet. Of course,
assistive in this transformation are today’s technologies that reduce the entry cost to creating
and then realizing upon such an asset.

Let’s start with preparation, which requires nothing more than a provision contained in
commercial contracts that interest be chargeable upon default, most importantly before as well
as after judgement. To add icing on the cake so to speak, a contract can also provide for
recovery of all legal fees and expenses incurred in effecting and collecting upon a judgment.
These are standard provisions in more comprehensive contracts, but have yet to be included in
many commercial agreements. Inclusion of these provisions paves the way for maintaining and
perhaps even increasing the value of realizable bad debt.

Next, let’s look at timing. In order for bad debt to become an asset it must not be defeated by
statutory limitation periods, that in essence wipe out legal means to realize upon bad debt after
a stipulated period of time. In the Province of Ontario the ability to pursue legals remedies for
most contractual defaults are extinguished two years after the default, although there are
specific provisions related to different kinds of defaults and the common law provides for certain
exceptions that can potentially extend such limitations periods if applicable.

Finally, there are stages of bad debt realization that can determine the level of certainty and in
turn the value of the bad debt asset, and it is this conversion from a right to collect into actual
funds received that is detailed below.

Essentially there are at least three ways that your bad debt becomes an asset -

I) Converting the Chose in Action

First, in most jurisdictions upon commencing a lawsuit the limitations period applicable to
realizing upon the defaulted contractual obligations stops. This means that the bad debt that you
have structured into a claim has been crystallized as to its existence in the eyes of the law. This
is whether or not the legal claim results in a judgment, as even if the debtor cannot be found by
commencing suit you have solidified the “chose in action” that can be revived potentially
perpetually. This is the basis of an asset that provides a continuing right to recover against a

As set forth in Wikipedia, “A chose in action or thing in action is a right to sue. ... It is an
intangible property right recognised and protected by the law, that has no existence apart from
the recognition given by the law, and that confers no present possession of a tangible object.”
By commencing suit within the applicable limitation period, the right to sue is maintained and not
lost. While this right in itself is not normally subject to assignment and therefore sale, it is this
entrenchment and confirmation of the right that brings with it the future potential for realization
upon the bad debt to which it is attached.

II) The Judgment

By taking the legal claim through to judgment, you not only crystallized the existence of the
claim, but the amount as well. Judgments can then be realized upon themselves or sold for
realization by others. For instance, the startup offers a portal for
buyers and sellers to deal in judgments, that recently had judgments for sale ranging from
approximately 3% to 60% of principal judgment amounts, being 3-60 cents on the dollar
depending on the quality of the judgment.

In addition, in many jurisdictions judgments have a perpetual life subject to bankruptcy or similar
statutory relief channels. This perpetual duration is of key importance where the debtor at time
of default may not have the means of repayment, but over time can improve their financial
position. Should the debt not have been crystallized through commencement of a legal
proceeding, and then reduced to an obligation in the form of a judgment, there would be little if
any recourse against a debtor and bad debt would remain just that.

Notably, to the extent that the original instrument under which the debtor defaults provides for
pre- and post-judgment interest, the intervening time between default and eventual realization of
the debt can be compensated by the cost of funds.

III) Garnishments & Writs

Finally, by executing on a judgment the bad debt is translated into fungible assets, whether into
money or a payment plan. Whether through garnishments of wages or bank accounts, or
seizures of real and/or personal property that can then be sold, your bad debt has been
exchanged for liquid funds.

Action Plan

So what do you to do need to convert your bad debt into an asset? Simply put in place a
process by which your receivables are moved into a litigation procedure on a regular basis.
Optimally this means all your bad debt, at least to the point of converting a chose in action.
Then when you have obtained judgment, you have a choice to realize upon the debt yourself or
sell it - either way you’ve created an asset from what most consider to be worthless paper.

Using Legal IA (Intelligent Automation)

Notably, today’s litigation process does not necessarily have to involve expensive legal
expertise, as LegalTech has resulted in automated lawsuit platforms that can process claims
efficiently and effectively, while pushing down associated costs measurably. Intelligent legal
automation can replicate repetitive tasks, reducing costs associated with large legal staff. With
the use of data and algorithms, legal departments are able to use an IA technology system to
extract the data to generate a claim and check for accuracy in minutes. Intelligent legal
automation allows legal departments to do a variety of tasks cost effectively, efficiently and most
importantly, accurately and cost effectively. Such platforms do well in an environment of
relatively standardized claims and higher ceiling small claims court thresholds, as would benefit
in-house legal departments or commercial law firms.

DISCLAIMER: The above is not meant to offer or be a substitute for legal advice and should
only be taken as a general overview for which advice must be sought to confirm applicability
specific to your situation.