What is Bad Debt?

Lending companies or other companies with Receivables may characterize certain unpaid accounts as Bad Debt and write off the losses.

Bad debt is debt that is on the books and is in default, meaning payment has not been made on it in a long while. Creditors, banks, and companies may periodically get bad debt off of their accounting books by moving it out of Receivables.

Most companies have attempted to calculate their exposure to default risk and bad debt, and have allocated amounts into accounts such as Allowance for Doubtful Accounts (ADA). It can be passed off to debt collection agencies, but most of the debt will never be recouped.

Individuals with bad credit scores are seen as potential sources of bad debt, and these institutions will either avoid giving them credit or e them enough interest to make it more palatable. Individuals and businesses have credit rating scores that will decline more and more if they do not pay their debts off in a timely manner, and this score is publicly searchable to protect lenders and consumers from exposure to unnecessary risk.

Bad debt can be defined with a threshold amount at which point it becomes more expensive to attempt to collect the debt than to give up and write it off.

What is Collateral?
What is a Debenture?