USA Accounting Entries for application of Debt Protection payments

[Robert J.]

Debt protection products help consumers pay off a debt or continue or suspend payments upon the occurrence of unfortunate and unpredictable events like death, disability, and involuntary unemployment. The credit insurance version is almost as old as familiar consumer credit itself, but there also are newer forms of debt protection called debt cancellation and debt suspension agreements.

If an EVENT happens, and the lending institution is notified after an elongated period (say 1 year) what is the appropriate way to account for covering payments due to said EVENT?

Example: Say a Divorce is the event, and the borrower forgot they had Debt Protection which included that event until a year after the Divorce occurred. At that point, notifies lender that Divorce happened, and would like application of Debt Protection as stated for the loan.

The Loan system can easily go back and post payments back to the EVENT date to change statements for Principal and Interest. My question, is how is this supposed to be handled when a Fiscal Years books were closed for GL purposes? Or if Loan had been charged off?

 

[smallbushelp]

Hi Robert, if you still need input on this, please advise if your company is the insurer who provides the protection or a lender who received a payment on behalf of an insured consumer.

 

[Robert J.]

The company is the lender who received a payment on behalf of an insured consumer.

 

[smallbushelp]

Well then, if the debt is still on the books, your accounting system should be able to tell you what the current balance of principle, interest and fees is. If you received a payment less than that total, then you are going to have to decide if you will take a loss on the account or continue to try to collect from the consumer - regardless of whether or not your fiscal year end books are closed. I wouldn't back date the payment if that's what you were thinking. The payment should be posted with the date it was received; it's their fault if they didn't act quicker.

However, if the loan has been written off, you could either post the payment and credit bad debt expense or credit an other income account like "recovery of bad debts" depending on how common the occurrence is. Does that help?