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There are several events that occur when a loan has become uncollectible. These events may occur in any order. They may happen all at once or over several months. The first event is usually legal action taken with the assistance of an attorney. In GMS-RLSS, you will usually change the loan status to Write-off at this time. You should also take some time at this point to review the terms of the loan as reflected in the Loan Master file. Should any of the terms of the loan be changed at this time? For example, will interest stop accruing? If so, change the interest rate to 0.0%.
When ready to bring the loan balance to zero, follow these steps:
The next major event is writing the loan off in accounting records. You will need to adjust the balance of either Notes Receivable or Loans Disbursed, depending on the method used to account for Revolving Loan Funds. Credit either Loans Disbursed or Notes Receivable, and debit either Loans Written Off (an expense account) or Allowance for Bad Debts (a liability account).
If using the Journal Entry created by GMS-RLSS, it will need to be edited before posting to the accounting system. The Journal Entry will post the amount of the loan written off as a debit to cash, which will need to be changed to a debit to either Loans Written Off or Allowance for Bad Debts.
If there is subsequent recovery of some of the amount written off, use Loan Activity to disburse the amount being recovered. Then use Loan Activity again to post the recovered funds as a repayment.