Bad Debt Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Bad Debt, written in plain English, along with examples of how it is used.

What is Bad Debt?

(n) Bad Debt is the amount receivable for any services rendered or goods exchanged to a person or entity which has not been paid or otherwise adjusted and the chances of getting that payment was nonexistent. The term is used in income tax provisions wherein the bad debt is treated as an expenses of the business entity

History and Meaning of Bad Debt

Bad Debt is a financial term that describes an amount of money owed by a debtor that is unlikely to be paid back. It typically refers to situations in which a business has provided goods or services to a customer on credit, but the customer cannot or will not pay the debt. Bad Debt is an important concept in accounting because the write-off of a Bad Debt can have tax implications.

Examples of Bad Debt

  1. A retail store sells products on credit, but one customer has not made a payment in six months and cannot be contacted. The store may then choose to write off the debt as Bad Debt.
  2. A contractor provides services to a client, but the client goes bankrupt before paying the full debt owed to the contractor. The contractor may choose to write off the debt as Bad Debt.
  3. A bank lends money to an individual, but after the person defaults on several payments, the bank determines that the debt is unlikely to be recovered and writes it off as Bad Debt.

Related Terms

  1. Accounts Receivable - refers to money a company is owed by its customers for goods or services that have been sold but not yet paid for.
  2. Write-Off - occurs when a company declares an account or asset as uncollectible and removes it from its balance sheet.
  3. Bankruptcy - legal proceedings in which an individual or business can seek relief from debt by reorganizing their financial affairs or having debts discharged.