# Handling write-offs

A **write-off** is what your accounting team does when an account receivable is no longer collectible. In our system, a placement that finishes in `closed_uncollected` (or `recalled` for a non-collection reason) is a candidate for write-off in your books.

This page is general guidance. Specifics depend on your accounting method and tax situation — work with your accountant.

## When to write off

Common signals:

* The placement closed `closed_uncollected` after the strategy agent exhausted outreach (the agent's `close` tool flipped the status).
* The debtor filed bankruptcy and you don't expect a meaningful distribution.
* The debtor is out of business with no successor entity.
* The debtor cannot be located despite skip-tracing.
* The debt is past the statute of limitations.
* A judgment exists but the debtor is judgment-proof.

The dashboard shows the `closed_uncollected` status on the placement detail page, with the `resolved_at` timestamp marking when the agent closed it.

## The accounting entries

Under accrual accounting:

| Step                            | Entry                                                          |
| ------------------------------- | -------------------------------------------------------------- |
| Original sale                   | Debit AR; Credit Revenue                                       |
| Reserve for bad debt (estimate) | Debit Bad-debt expense; Credit Allowance for doubtful accounts |
| Write-off actual loss           | Debit Allowance for doubtful accounts; Credit AR               |

Under cash accounting, you don't recognise the revenue you didn't collect. There's no specific entry for the write-off because the income was never booked.

> Talk to your accountant if you're unsure which applies to you.

## Direct vs. allowance method

Two common methods for accounting for bad debt:

* **Direct write-off** — wait until a specific account is known uncollectible, then write it off. Simple but doesn't match expense to revenue period.
* **Allowance method** — estimate uncollectible amounts each period and reserve against them. Better matching; generally required for GAAP financials.

Most small businesses use direct; most companies preparing audited financials use allowance.

## Tax treatment

For US federal income tax:

* Business bad debts are typically deductible against ordinary income in the year they become worthless (IRS Publication 535).
* "Worthless" generally means you've taken reasonable steps to collect and the debt is uncollectible.
* Documentation matters. Our placement audit trail, dispute history, and skip-trace results are evidence the debt was pursued in good faith.

For state taxes, treatment varies. Talk to your tax accountant.

## When a debtor pays after a write-off

It happens: an account is written off, then a year later the debtor surprises you with payment. This is a "**recovery of bad debt**":

| Entry                             | What it represents                      |
| --------------------------------- | --------------------------------------- |
| Debit Cash                        | The payment arriving                    |
| Credit Bad-debt recovery (income) | Reversing the prior write-off as income |

For tax purposes, the recovered amount is generally taxable income in the year of recovery.

## Documentation we provide

This is the honest state today:

* The **placement audit trail** is the authoritative record of our outreach and is the substrate of what you'd use to substantiate a bad-debt deduction. It's queryable via the dashboard placement detail page, and bulk-exportable via `POST /v1/exports` with `kind=placements`.
* **Call recordings and transcripts** are linked from each call record on the placement; subject to the retention period set at the platform level.
* **Email correspondence** is captured per placement and visible alongside the call timeline.
* **Dispute history** appears on the placement detail page if any disputes were raised.

> A bundled "write-off package" download — a single PDF or zip containing the invoice, audit log, calls, emails, and disputes for one placement — is **planned but not yet available.** Today you assemble the substantiation from the placement detail page and the audit-log export.

## Statute-of-limitations note

After a state-specific period (typically 3–6 years for written contracts), a debt becomes **time-barred** — meaning the debtor can raise the statute of limitations as a complete defense. You can still write it off, but you can't sue and you generally shouldn't attempt collection (it may itself violate FDCPA / state-mini-FDCPA in some jurisdictions).

Our compliance engine enforces state rules at the outreach layer; a per-state statute-of-limitations matrix surfaced to creditors is on the roadmap but not yet shipped.

## TODO

* Screenshot: placement detail page showing `closed_uncollected` status and `resolved_at`.
* Screenshot: audit timeline on a closed placement.

***

Last reviewed: 2026-05-12 by Finance Lead. **TODO: tax accountant review of allowance-method language.**


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