Bad Debt

Loading the player...

What is 'Bad Debt'

Bad debt is debt that is not collectible and therefore worthless to the creditor. This occurs after all attempts are made to collect on the debt. Bad debt is usually a product of the debtor going into bankruptcy or where the additional cost of pursuing the debt is more than the amount the creditor could collect. This debt, once considered to be bad, will be written off by the company as an expense.

BREAKING DOWN 'Bad Debt'

Most companies make sales on credit as it generally allows them to increase their sales, even though some sales are to customers with less than desirable credit. Companies that do make credit sales will estimate the amount of sales they expect to lose to bad debt, which is found in the allowance for doubtful accounts.

A debtor with a history of bad debts will see their credit rating decline, which makes it difficult for the debtor to access any additional form of credit.

RELATED TERMS
  1. Debtor

    A company or individual who owes money. If the debt is in the ...
  2. Debt Assignment

    A transfer of debt, and all the rights and obligations associated ...
  3. Bad Debt Recovery

    A debt from a loan, credit line or accounts receivable that is ...
  4. Debt Buyer

    A company that purchases debt from creditors at a discount. Debt ...
  5. Debt Fatigue

    When a debtor stops making payments on his or her debts and starts ...
  6. Debt Snowball

    A method of debt repayment in which debtors pay off their smallest ...
Related Articles
  1. Investing

    Understanding Bad Debt

    Bad debt is money a company or lender is owed, but is unable to collect.
  2. Insights

    What is a Bad Debt Expense?

    Bad debt expenses are debts a company incurs when it sells goods or services, but receives no payment or partial payment.
  3. Personal Finance

    Inside Secrets of the Debt Collection Business

    Understanding how the debt collection business works will give you a better chance of coming out ahead if you ever have to tangle with a collection agent.
  4. Personal Finance

    Dawn Of The Zombie Debt

    Are old debts coming back to haunt you? We'll show you how to keep these zombies from eating you alive.
  5. Personal Finance

    Consolidating Debt: What If You Have Bad Credit?

    Getting a debt consolidation loan is more difficult when you have bad credit. But it could still help put you on the road to improving your credit score.
  6. Financial Advisor

    Advising FAs: Explaining Debt to a Client

    This article examines the different types of debt and breaks down which types of debt are better than others. The main types of debt covered here include car loans, credit cards, mortgages and ...
  7. Financial Advisor

    The 4 Best Debt Reduction Services

    It can be tricky to find the best debt reduction services for your financial situation. These top 4 debt consolidation firms help make the process easier.
  8. Personal Finance

    7 Tips For The Do-It-Yourself Debt Manager

    Hired gun not in your budget? Learn to be your own credit counselor.
  9. Markets

    How Countries Deal With Debt

    For many emerging economies, issuing sovereign debt is the only way to raise funds, but things can go sour quickly.
  10. Markets

    What's a Debtor?

    A debtor​ is an individual or company that owes money.
RELATED FAQS
  1. What is a good debt ratio, and what is a bad debt ratio?

  2. How do debt collection agencies make money?

    Find out how a collection agency makes money, what rules it is bound by, and when it can take a pay check or garnish a bank ... Read Answer >>
  3. What are my rights under the Fair Debt Collection Practices Act (FDCPA)?

    Read about the rights and protections granted to you as a debtor under the Fair Debt Collections Practices Act, and learn ... Read Answer >>
  4. If a collection agency buys my debt from another agency, does the debt become 'new'?

    Find out what happens when your debt account is sold from one collection agency to another and the impact on your balance ... Read Answer >>
  5. Do creditors have the same rights in all 50 US states?

    Learn more about the rights of creditors to pursue their debts; how they may vary from state to state and how they are regulated ... Read Answer >>
  6. How long do typical debt management plans take to pay off debt?

    Find out more about how debt management plans are administered and what circumstances determine how long a management plan ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center