What is a bad debt

A bad debt occurs when a company’s customers are unable to pay all or part of the amount owed, often due to factors such as bankruptcy. In accounting terms, a bad debt indicates that an invoice has not been paid, resulting in a potential loss for the business.

Bad debt is essentially any amount of money that a creditor must write off when a borrower defaults on loans.

This situation arises when the debtor, whether an individual or a business entity, displays no promise of repaying the borrowed amount, either partially or in full. When such debts become uncollectible, they are recorded as charge-offs.

When should invoices be written of as bad debt?

Several criteria must be met to write off an invoice as a bad debt:

  1. The invoice has been forwarded to debt collection, but payment has not been received.
  2. Twelve months have elapsed after the due date, and at least three reminders have been sent without resolution.
  3. The customer’s company has declared bankruptcy or undergone liquidation.
  4. A bankruptcy estate has been established for the customer, but there are no available funds.