Bad Debt Collection for Business

In the business environment, bad debts are often inevitable for businesses. When the debts are prolonged, become unpayable, or the debtors lack goodwill for settlement, they will turn into bad debts – posing significant risks that directly affect cash flow, reputation, and operational capacity. In this article, TNTP’ lawyers will analyze the concept, causes, impacts, collection process, and solutions for bad debts, while clarifying the role of professional legal services in supporting businesses to handle debts effectively, legally and sustainably.

1. Concept and causes of bad debt

1.1 What is bad debt?

In practical business operations, bad debt is commonly referred to as “doubtful debt” – a type of high-risk debt and may be irrecoverable if not addressed promptly and appropriately. In other words, bad debt refers to a debt that has been overdue for a significant period, when the obligated party is either unable or unwilling to fulfill their payment obligations.

However, the criteria for identifying bad debt are often relative, depending on the nature of the business, business partners, and the duration for late performance of obligations of each enterprise. For clearer reference, parties may rely on specialized legal regulations – specifically, Circular No. 31/2024/TT-NHNN issued by the State Bank of Vietnam detailing asset classification in the operations of commercial banks, non-bank credit institutions, and foreign bank branches.

According to Clause 5, Article 3 and Article 10 of this Circular, bad debt is defined as on-balance-sheet loans classified into Group 3 (substandard debt), Group 4 (doubtful debt), and Group 5 (potentially irrecoverable debt). These debts reflect a client’s inability or difficulty in repaying them on time, causing partial loss to total loss. Specifically, bad debts include overdue debts by 91 days or more, restructured debts that remain unpaid, or debts subject to legal violations and recovery orders from inspection authorities that have not yet been collected.

1.2 Distinguishing between Overdue Debt and Bad Debt

Businesses and economic organizations should clearly understand the distinction between two commonly confused terms: “Overdue Debt” and “Bad Debt”:

• Overdue Debt: Refers to receivables that have reached their due date but remain unpaid. Although delayed, the debtor may still have the capacity to pay in the future.
• Bad Debt: Refers to receivables that are not only overdue for an extended period but also show signs that the debtor is unable or unwilling to fulfill their obligations, often accompanied by deliberate delays or lack of cooperation.

Thus, not all overdue debts immediately become bad debts. However, without proper control mechanisms and timily handling measures, overdue debts can quickly “transform” into bad debts.

1.3 Common causes of bad debts

From a practical business management perspective, several common causes of bad debt include:

• Financial difficulties faced by the debtor, such as losses, bankruptcy, or insolvency.
• Commercial contracts lack clarity, especially in payment terms and penalty clauses for breaches.
• Lack of credit policies, loose receivables management, including granting credit limits to partners without sufficient financial capacity.
• Lack of systematic mechanisms for monitoring, reconciling receivables, and issuing regular payment reminders.
• External factors such as economic fluctuations, recessions, inflation, or sudden changes in legal policies.

Clearly distinguishing between overdue debt and bad debt is crucial for financial management. Bad debt not only causes direct cash flow losses but also carries significant legal risks. Therefore, each business should proactively establish receivables management procedures, conduct partner assessments, and implement early intervention mechanisms as soon as overdue debts arise – to minimize the risk of bad debt and safeguard long-term interests.

2. Impacts of Bad Debt on Businesses

• Financial Impact: Bad debt directly reduces cash flow and a company’s liquidity. When cash is “frozen” in uncollectible receivables, the business may struggle to meet other financial obligations such as employee salaries, payments to suppliers, or bank loan interest. As a result, profitability is significantly affected.
• Operational Impact: Handling bad debt often consumes substantial internal resources. Management, accounting, and legal departments must spend time and effort on reminders, debt reconciliation, working with lawyers, or participating in legal proceedings. It diverts focus from core business activities, causing delays in project execution or market expansion.
• Reputational impact: Bad debt also indirectly damages a company’s reputation. When financial statements reflect a high volume of doubtful debts, the business may be perceived as having poor management and weak capital recovery capabilities. This can erode trust from banks, investors, and potential partners.
• Long-Term Consequences: If bad debt is not addressed promptly, the business may fall into a financial spiral: lack of capital → reduced production capacity → loss of market share → prolonged losses. Many small and medium-sized enterprises in Vietnam have been forced to dissolve or declare bankruptcy simply due to an inability to control bad debts.

3. Bad Debt Collection Process

In typical debt collection cases, negotiation and settlement are often considered reasonable initial steps, helping to preserve business relationships and minimize legal costs. However, in the case of bad debts, these measures are usually no longer effective, as the debtor may have lost the ability to pay or lacks the goodwill to fulfill financial obligations. Prolonged negotiations in such situations may reduce the likelihood of collection and increase risks for the business.

Nevertheless, negotiation and settlement can still be conducted in parallel with litigation and enforcement procedures, offering a chance for voluntary agreement, shortening the resolution timeline, and reducing implementation costs. This flexible approach allows businesses to safeguard their legal rights while enhancing the possibility of effective debt collection during the bad debt handling process.

Accordingly, the bad debt collection process typically includes:

Step 1: Initiating legal proceedings and dispute resolution at the Competent Authority

When a debt becomes problematic, the business may file a lawsuit with the competent People’s Court or request resolution through commercial arbitration (if the contract contains an arbitration clause). This is the first and most critical legal step to protect the company’s lawful interests and establish the basis for enforcement and collection.

Step 2: Judgment Enforcement once a Court Judgment or Arbitral Award becomes

After the judgment, decision of the Court or arbitration award comes into legal effect, the business may request the Civil Judgment Enforcement Agency to carry out enforcement. Coercive measures may include asset seizure and liquidation, freezing bank accounts, income garnishment, or other actions to ensure payment obligations are fulfilled. This is the decisive stage in determining whether the debt can be recovered, requiring close monitoring and coordination with the enforcement agency.

Recovering bad debt requires a combination of receivables management skills and legal expertise. Businesses must be proactive in identifying, classifying, and addressing bad debts early, while also adopting appropriate strategies at each stage—from negotiation to litigation and enforcement. A structured and proactive approach helps minimize risks, protect cash flow, and maintain long-term financial stability.

5. Effective solutions for Bad Debt Collection

To enhance the oppoturnity of recovering bad debts, businesses cannot rely solely on isolated aggressive measures. Instead, they must implement a comprehensive strategy that harmoniously integrates legal action, negotiation, and risk management.

• Maintain a professional yet firm approach: In all situations, businesses should uphold professionalism to ensure legal compliance and preserve their reputation. Communication should be conducted through formal, clear, and courteous written correspondence, strictly avoiding any coercive or unlawful tactics. Firmness should be demonstrated by setting specific payment deadlines and clearly asserting the company’s position in protecting its rights. The use of illegal methods such as threats or psychological pressure is not only counterproductive but also exposes business to administrative or criminal liability.
• Collaborate with legal professionals: One of the most effective solutions is to work with lawyers or law-practicing organizations. Legal experts can provide appropriate strategies for negotiation, litigation, and enforcement, and represent the business throughout the dispute resolution process. This helps reduce internal pressure while ensuring that all actions are legally compliant.
• Monitor and update information regularly: Effective bad debt control requires businesses to continuously monitor the debtor’s financial status and asset movements to take timely action. Simultaneously, companies should stay informed of new legal regulations related to litigation, enforcement, or bankruptcy to adjust their collection methods accordingly. Risk assessment activities should also be conducted regularly to enable a swift transition from negotiation to legal measures when necessary.
• Diversify collection methods: An effective debt collection methods often involves a combination of flexible approaches. Negotiation remains a preferred channel if the debtor shows goodwill, but businesses must initiate legal proceedings promptly to avoid missing the statute of limitations. Where possible, creditors should request additional collateral or guarantors to increase the chances of collection. Additionally, businesses may leverage oversight mechanisms from state authorities or even file criminal complaints if signs of unlawful conduct by the debtor are detected.
• Leverage technology in receivables management: In the digital age, technology plays a crucial role in minimizing bad debts. Debt management software can automate customer reminders and analyze payment history data to forecast risks early. Digitizing records, contracts, and documents also significantly supports businesses in providing evidence during litigation or enforcement proceedings.

An effective bad debt collection strategy requires a balanced combination of negotiation flexibility, legal assertiveness, and technological risk management. Only by integrating all three elements can businesses protect their cash flow, strengthen their reputation, and ensure sustainable growth.

5. The role of legal service providers in supporting businesses with debt collection

In the context of rising bad debt levels, handling receivables internally often consumes significant time and resources but yields limited results. Therefore, the involvement of law firms, legal practitioners, or legal experts becomes a critical factor—helping businesses protect their rights while minimizing legal risks.

• Assessing collection plans and advising on effective solutions: Lawyers will review the entire debt portfolio, contracts, and related documents to determine the legal status of each receivable. Based on this assessment, they provide an evaluation of collection potential, the realistic value that can be collected, and develop multiple handling scenarios. Businesses can then choose the most suitable approach, ranging from negotiation and mediation to litigation or enforcement.
• Participating in negotiation and settlement: Having a lawyer directly represent the business in discussions with the debtor ensures legal compliance throughout the negotiation process. This approach not only increases the likelihood of success but also helps maintain a professional image and avoid direct conflict with partners. If a payment agreement is reached, the lawyer will draft legally binding documents to safeguard the business’s interests in case of future breaches.
• Representation in litigation and enforcement: In cases requiring legal action, lawyers assist with drafting the statement of claim, preparing evidence, and participating in conciliation and trial hearings at court or commercial arbitration. Once a judgment or arbitral award becomes legally effective, the lawyer continues to support the enforcement phase, including asset seizure, bank account freezing, and handling collateral or guarantees.
• Minimizing legal risks for the business: A key benefit of legal support is helping businesses avoid unlawful debt collection practices, which could lead to administrative or criminal liability. Additionally, lawyers can provide preventive advice by refining contract procedures, adding clauses to secure payment obligations, or introducing penalty mechanisms to reduce the risk of future bad debts.
• Saving time and costs: With legal expertise and practical experience, lawyers can streamline the debt collection process, shorten dispute resolution timelines, and reduce prolonged litigation costs. More importantly, they can propose cost-effective strategies that balance implementation expenses with collection rates, helping businesses achieve optimal economic outcomes.

In conclusion, the role of legal service providers goes beyond mere “debt collection”—they serve as strategic partners. Lawyers act not only as legal representatives but also as advisors who help businesses prevent risks, optimize collection procedures, and ensure long-term legal security.

6. Preventive measures and management of Bad Debt

In business management, prevention is always more effective and less costly than dealing with bad debt after it arises. To minimize risks, enterprises should establish control mechanisms from the partner evaluation stage, through contract signing to receivables management throughout the cooperation process.

• Assessing the financial capacity and credibility of partners: Before signing a contract, businesses should conduct thorough due diligence. In addition to requesting financial statements, they can consult public information on business registration portals, contact previous partners, or review payment history in past contracts. Evaluating credibility and financial strength not only helps select safer partners but also provides a solid basis for including appropriate security clauses in the contract.
• Drafting comprehensive contracts: Commercial contracts should be carefully drafted with clear and complete provisions regarding payment obligations. These should include: payment deadlines and methods; applicable interest rates for late payments; penalties for breaches; remedies for non-performance; and dispute resolution mechanisms (Court or Arbitration). These provisions serve both as legal safeguards and as tools to ensure compliance from the partner.
• Regular monitoring and reminders: Even after a contract is signed, businesses must implement a strict receivable monitoring process. Using debt management software helps automate reminders, track payment progress, and reduce errors compared to manual methods. Additionally, businesses should periodically reconcile receivables with partners to detect irregularities early and take timely action to prevent prolonged overdue debts.

Preventing bad debt is not only about choosing the right partners but also about building a strong “legal fence” within contracts and maintaining disciplined receivables management. A well-structured prevention system helps businesses significantly reduce risk, protect cash flow, and lay a solid foundation for sustainable growth.

7. Frequently Asked Questions (FAQs)

Can bad debt be recovered?

=> Yes. Bad debt can still be recovered, but the collection rate is often much lower than for regular receivables. Bad debts typically carry high risks: the debtor may be insolvent, collateral may be difficult to liquidate or legally encumbered, and the collection process may be complex. With an appropriate strategy—such as litigation, enforcement, collateral handling, debt sale, or parallel negotiation—businesses may recover part or all of the debt, though full collection cannot be guaranteed.

What is the success rate for recovering bad debt?

=> There is no fixed or standardized collection rate for bad debt, as outcomes depend on various factors such as the type of debt, duration of delinquency, debt value, legal issues, and the debtor’s willingness to cooperate, as well as the litigation and enforcement process. Any available statistics are for reference only and do not fully reflect the reality of each specific case.

How long does it usually take to recover bad debt?

=> There is no fixed timeline for recovering bad debt – it varies case by case. Typically, the process may take several months to over a year if there are no legal complications. For disputed debts or those involving complex collateral, collection may take 2–3 years or longer.

What happens if the debtor goes bankrupt?

=> If the debtor declares bankruptcy, the business must submit a debt claim and supporting documents in accordance with the Bankruptcy Law 2014 to participate in asset distribution. Payments will be made in order of priority, but in practice, collection is often limited due to insufficient assets.

8. Professional legal services supporting debt collection in Vietnam

With years of experience in dispute resolution and debt collection, TNTP provides professional legal services to support businesses throughout the entire bad debt collection process, including:

• Legal consultation: Assessing specific situations, analyzing risks and benefits, and offering optimal solutions tailored to each business.
• Document preparation and evidence collection: Assisting in the preparation and review of contracts, financial documents, reconciliation reports, and other relevant legal paperwork.
• Client representation in Negotiations: Acting on behalf of clients to negotiate with debtors, aiming to reach favorable agreements and minimize losses.
• Support in dispute resolution at Competent Authorities: Advising and assisting clients in filing lawsuits and participating in legal proceedings to protect their lawful rights.
• Support during Judgment Enforcement: Accompanying clients through the enforcement process to ensure that legal rights are effectively executed in practice.

Bad debt poses a significant challenge for all businesses, not only causing financial losses but also exposing them to legal and managerial risks. Addressing bad debt requires determination, legal expertise, and a strategic risk management approach—from early identification to litigation and enforcement.

To achieve the highest collection efficiency, businesses should adopt a comprehensive strategy that combines legal measures, flexible negotiation, and expert support from law-practicing organizations. This approach not only facilitates debt collection but also strengthens financial foundations, protects reputation, and promotes long-term sustainable growth.

This article, “Bad Debt Collection for Businesses” was prepared by TNTP’s lawyer. We hope it provides valuable insights for our esteemed readers.