Bad Debt


DEFINITION of 'Bad Debt'

A 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.


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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.

  1. Credit Rating

    An assessment of the credit worthiness of a borrower in general ...
  2. Debt Discharge

    The cancellation or forgiveness of a debt. Debt discharge results ...
  3. Allowance For Doubtful Accounts

    A contra-asset account that records the portion of a company's ...
  4. Credit Risk

    The risk of loss of principal or loss of a financial reward stemming ...
  5. Default Risk

    The event in which companies or individuals will be unable to ...
  6. Impaired Credit

    A deterioration in the creditworthiness of an individual or entity. ...
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