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About Bad Debt

In [accounting] and [finance], bad debt is the portion of [receivable]s that can no longer be collected, typically from [accounts receivable] or [loan]s. Bad debt in accounting is considered an expense.

US Accounting Practice Because of the [matching principle] of accounting, [revenue]s and [expense]s should be recorded in the period in which they are incurred. When a sale is made on account, revenue is recorded along with account receivable. Because there is an inherent risk that clients might [default] on payment, accounts receivable have to be recorded at [net realizable value]. The portion of the account receivable that is estimated to be not collectible is set aside in a contra-asset account called Allowance for Doubtful Accounts. At the end of each [accounting cycle], [adjusting entries] are made to charge as expense the uncollectible receivable. The actual amount of uncollectible receivable is written off as an expense from Allowance for Doubtful Accounts to the account called Bad Debt Expense.

Taxability Some types of Bad Debts, whether business or nonbusiness related, are considered deductible. Section 166 of the [Internal Revenue Code] provides the qualifications which must be met in order to meet deductibility status.

Criteria for deduction:

Must be a bona fide debt; and
Worthless within the taxable year

A debt is defined as a debt which arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a determinable sum of money. The debt in question must also be considered worthless. This distinction is further broken down into the level of collectibles. One must determine whether the qualifying debt is completely or partially worthless. A partially worthless status means a portion of the debt may be recovered in future periods. Numerous factors are taken into consideration including the debtor’s insolvency status, health conditions, credit standing, etc.

[Section 166] does limit the amount of deduction allowed. There must be an amount of tax capital, or basis, in question to be recovered. In other words, is there an adjusted basis for determining a gain or loss for the debt in question.

An additional factor in applying the criteria is the classification of the debt (nonbusiness or business). A business bad debt is defined as a debt created or acquired in connection with a trade or business of the taxpayer. Whereas, a nonbusiness debt is defined as a debt that is not created or acquired in connection with a trade or business of the taxpayer. The classification is quite significant it terms of the deductibility. A nonbusiness bad debt must be completely worthless in order to be deducted. However, a business bad debt is deductible whether it is partially or completely worthless.

Information Reference: Wikipedia.org

Bad debt

Questions and Answers

How do I write off a bad debt in a trial balance?

Q) I am having difficulty making my trial balance balance. I have too many different things on my trial balance that are confusing me. I have lines for bad debts, provision for bad debts, bad debts written off and one for increase provision bad debt. i seem to have done what i was told to do but its not balancing, any help would be greatly appreciated.. I know all my figures are correct until the trial balance. the difference between my debit and credit accounts is double the figure that's the increase in the provision. but everytime i mess around with the adjustment figures and they balance the extended trial balance doesnt or vice versa.. arg

A) I think that you should have amongst the opening balances (dr column) bad debts account, showing total of bad debts already written off during the year. Debtors will have been reduced to take account of this, ie that is the credit entry. Also, on the credit side of the opening balances you should have the opening bad debt provision, which was created in the previous year. Now, if you are increasing the bad debt provision for the current year, you need to debit the P&L a/c with the increase, and extend the new total into the liabilities side of the balance sheet. I am not sure what you mean by 'I have lines for bad debts', do you mean in addition to bad debts written off. If you have bad debts that still need writing off, in addition to those already written off, then you need to reduce debtors in the balance sheet and add them to bad debts already written off. Your closing P&L a/c should show total bad debts w/o (dr entry). Increase in b/d provision ( dr P&L a/c ) The balance sheet will show as a liability, the total bad debt provision. This is the opening balance plus the increase. As your closing balance sheet is out by double your bad debt provision increase, your problem must be there. HAVE YOU CHARGED (DR) THE INCREASE IN PROVISION TO THE P&La/c? HAVE YOU ADDED THIS INCREASE TO THE BROUGHT FORWARD BALANCE AND SHOWN IT AS A LIABILITY IN THE BALANCE SHEET?

i have bad debt threw various companys. i would love to be able to just try and put this right.help?

Q) i have bad debt, but i have recently had a baby and id like to apply for a credit card, pay off my debts and buy some stuff i desperatly need out of it too. but no credit card i apply for accepts me. does anyone know how i can get any money quick? (I am not in a position to go back to work yet) or any credit cards that accepot bad credit history or loans etc?

A) There are loans you can get but with no solid proof of repaying it, they will not touch you. You would be considered a risk. The worse thing you can go is to get into debt when you have no job and a new dependent. The last resort would be Provident but they charge really high rates because they come out to collect the money every week.

accounting - a bad debt of 5000 written off is it in balance sheet??

Q) right im trying to put together a p&l and a balance sheet for exam i have tomorrow,! however slightly confused with the bad debt of 5000 is fully written off at 31 dec 04, but there is no specific doubtful debtors. the general bad and doubtful debt provision should amount to 3% of debtors (total debtors is 125,000) so i figured for the p&l i have to write off 5,000 (thats with the costs) and create a provision 120,000*3%=3600 for balance sheet would 5000 go in current libablities (as i have written this value off, or would i not mention it) thanks

A) If what you are asking is: A specific debt of $5,000 should be written off at year end AND the Allowance for Doubtful Accounts at year end should be 3% of debts ($125,000). Is that the question? If so, you write the $5,000 off against the Allowance for Doubtful Accounts (credit Receivables, debit Allowance). Then you look at the amount remaining in the Allowance and see how much you would need to add to get the amount to $3,600 (3% * $120,000). You would debit Bad Debt Expense and credit Allowance for that amount. Good Luck!!

Bad debt written off?

Q) I had a discussion with someone who said that companies will write off bad debt after 5 years of trying to recover it, i disagree, does anyone know the actual facts about this?

A) Ask your local citizens advice they will tell you the facts!!!

I got a CCJ 6 years ago for a bad debt and never satisfied it in full? Can they still get me?

Q) I had a bad debt (I had repaid the loan 3 times over but they kept wanting more and I was skint)b and received a CCJ to pay it back. I paid some but never finished hence the judgement was never satisfied. 6 years later a debt recovery agency have brought the debt and are chasing me threatening court again. Is there a limitation period on an unsatisfied judgement? I have a niggling thought that I cannot be chased nor taken to court again as nothing has been done for over 3 years, am I right?

A) i think it is spent after six clear years with no contact.

How do you find out how long your name is to be in bad debt?

Q) I know the duration is 6 years. I sent away to Equifax but they only told me who I owed which I already know How can I get the name of the company who put my name in bad debt in the first place.

A) Things are to roll off after 7 years .... Good Luck!!

Really bad in debt,?

Q) I'm really bad in debt and can't see a way out, I owe my bank £70 plus Sky TV £82. I have a ccj agaist my name because I did not pay a bill when I was 19. I'm really bad in debt and I'm not copng to will. All to altogether I owe over £320, Is there anyway out of this> please help. I work full time.

A) Part time job? More income.

bad debt (uk) please help?

Q) my best friends b/f has lots of debt (approx £40000) problem is she loves him and wants a life inc a mortgage with him, can any one give me some advice to better his credit rating or maybe suggest a mortgage company who would allow this debt to be put onto the mortgage! please help as hes at rock bottom and she doesnt know what to do, she feels like chucking it all away but loves him 2 much & know he wants help to get his self out the hole! but is on anti depressents so everythings just a fuzz! i need advice to go talk some sence 2 them! - p.s the debt is from an ex partner and ex business that folded!

A) Tell them to go to their nearest Citizens Advice Bureau, or contact the Consumer Credit Agency; they are the ONLY organisations within the UK that provide truly impartial, professional and free debt advice. Any of these consolidation loans or massive mortgages are a con in the long term and will just get them into more trouble. They may just have to face the likely reality that a mortgage is not possible for them at this time though; it could be renting or nothing for the time being.

clear bad debt history?

Q) More than 6 years ago debt incurred Left the UK 6 years ago without settling outstanding bills. Have tried to contact 1 company but told account now closed. Do they automatically close after this time. If so is it possible to have previous history of bad debt wiped?

A) Been there and going through the process of cleaning up my credit. Don't do dept consoldation if you can help it. It ends up looking like slow pay which can be worse that abandoning the debt - crazy I know- but true! It takes longer for debt to roll off now a days. But you can pull a credit report (you get one free one a year now) to see what still shows. If you have the money offer a paid in full settlement as you see fit by calling the debtor. I had a visa and I owed them 800$ and they allowed me to pay 450 to settle the entire bill. Just don't send payment until you have the agreement in writting via letter or fax. If you want-email me and I can help further. Good luck!

People that know about Credit and bad debt please answer here.. CCJ's, Attachment of earnings etc?

Q) I have asked 2 questions that maybe haven't been specific enough, please dont give me answers like they'll find you. I need someone that knows what they're talking about.. Im in a lot of debt, if i moved away, and changed my name, started afresh, no links on the credit file. The only thing i cant change is my national insurance number. If my creditors went to court, they have my national insurance number from loans, and my old employers details, but ive since lost my job and im unemployed at the moment. Could they find me by my national insurance number? Can the court find where im living by that? Do they have access to Department of Working Pensions, (inland revenue) details, and what they hold on me like my new address etc. What powers to the court/creditors have to find me?

A) It's not a matter of what 'powers' they have - it's what they will do to find you, legal or otherwise. I once worked with a private detective who told me quite clearly : nobody can disappear. Anyone can find anyone else. It's all a matter of economics - are you worth the amount of time, trouble and expense it would take to find you? If you are, they will find you. Count on it. If they trace you through illegal means they simply claim someone saw you in the street or on a bus and called them, or they got an anonymous letter, which they will produce in court. You can run, and you can hide, but whether or not you can get away depends upon how much you owe and to whom you owe it and how determined they are to get their money back. Someone else here suggested bankruptcy as a solution, and that is certainly something you should think about. An IVA is also a good step forward. But, one word of advice - never, ever pay a Debt Management Company to set up and IVA for you. See a counselling service (several other answers tell you who they are, or just Google them) and have them guide you through the process, which is either free or costs very little. Good luck.

Bad Debt. What sort of companies get bad debt. full points for answer with a few examples of companies?

Q) please list examples of businesses types that would generally get bad debt , any TYPE of company eg.. car mechcanics NOT teds car mecanics. Full points to best answer thanks a bunch!!!

A) Whole Sale Distributor Company and Retail Stores or any business that involves buying and selling are potentially subject to bad debts.

Bad Debt Collections Calls...?

Q) I'm doing a role play on Bad Debt Collection Calls as a project for my class; it's easy to find infomations on the right way to do collection calls, but I really need examples of Bad calls... ...any website or info I can refer to to get started? Thanks....

A) By "bad calls" what do you mean? I do have some excuses on my website www.credit-and-collections.com but if you can tell me more specifically what ou need, I should be able to help you. Michelle Dunn www.michelledunn.com

Bad debt going on your personal credit report?

Q) I know anything is possible but the bad debt is 2 years old and it has not shown up yet on my personal credit report. The accounts were opened up under my tax id.

A) if your social security number is on the debt,, seems it would show up on your credit report,, unless the person you owe does not belong to any reporting agency. you can check your credit report for free one time each year at each of the three major reporting agencies,, here's a link it's called annual credit report.com

Bad debt write off,?

Q) I had/have a loan through a mortgage company; they written off the remaining loan off as "bad debt" and closed the account. It's been verified when I pulled my account. They have made no attempt in trying to contact me and I did notify them of my new address and contact info. What are my options and can I remove this from my credit report. Respectfully, also, am i still required to repay the loan even if they written it off as "bad debt"?

A)

Is personal bad debt deductible on my tax return?

Q) A friend of mine wanted to borrow a large sum of money for emergency. Although it was sort of strange to ask, I told him yes, but he had to sign a promissory note (drawn up by WillMaker or some other software). Now many months passed but I never seen a dime of it. Can I write this loan as bad debt on my tax return?

A) You may have a nonbusiness bad debt. Your promissory note hopefully has a repayment time period. You can deduct the bad debt in the year the promissory note becomes totally worthless, that is, there is no chance of repayment. The nonbusiness bad debt is deducted as a short-term capital loss subject to the $3,000 per year limit ($1,500 if married filing separately). Attach a written statement to your return detailing the debt. This return will need to be mailed in.

Collections and bad debt?

Q) I've looked up some information, but i cant find exactly what i want to know... so maybe some one can just tell me...If i pay a collection, it wont be off my credit report for 7 years? y? And bad debt, If i pay that off, will that be removed? Should i wait 7 years to have my credit clean or work on removing items?

A) Before doing any credit repair, opt out first. You should send a debt validation letter to the collection agency. Their response shoud totally validate the debt. If you feel that their respones is correct and you want to pay it - send a pay for delete letter. Request that they remove the account from your reports upon payment, that they will not continue to collect the debt, that they will not sell the debt or the remainder of the debt if you have an agreement with them to only pay them a percentage of the amount. In that letter you should request to pay a percentage of the debt. Collection agency's pay roughly around .50 cents on the dollar for those accounts. Junk debt buyers pay only pennies on the dollar or even less. You should also do some research and find out your statute of limitations for the debt in your state. If it is past the statute of limitations, you are not legally required to pay the debt. Paying it at that stage would be your decision. If it is past SOL and you do not pay it, they can only legally report the account for the original 7 years. They cannot re-age the account. Learn your rights. I would suggest popping in to the site that I am linking and do some reading.

If a bad debt is scheduled to come off your credit report is it possible for the creditor to switch companies?

Q) so that the bad debt stays on the report.. (still owe money) Let me add that this is charged off as a bad debt already

A) They can sell or assign the account at any time - but once it has passed the legal reporting period it would be illegal for them to re-age it and continue reporting.

How to overcome bad debt???

Q) I have bad debt on my credit card but some site that i click which supposed to help my condition always gives signal that its only USA person. So i need more information for International helping.

A) Call a credit agency.

My fiance has bad credit and high debt. How does this affect me when we get married?

Q) My credit is good and I try to always pay bills on time or early. I have some debt as well but so far its under control. So what should my concerns be regarding his bad debt and our marriage?

A) One of the fastest ways to get cash with bad credit, and little hassle, would be with a payday loan. Yes they have terrible interest rates but they are taking a risk. This site offers more details about the payday loans as well as various sites offering the loans, many without even a credit check. Do your homework. Best starting point is here: http://tinyurl.com/23zhb7 Good luck.

How long does bad credit follow you?Can and old bad debt resurface?

Q) I was told bad debt may linger or re-surface when debt is sold to a collection agency

A) Bad debts are reported to the credit bureaus for 7 years after last delinquency. It does not matter how many times the debt is sold or re-sold, it will drop off after 7 years. Unscrupulous debt collectors may try to collect on the debt indefinitely banking on your ignorance of the law. After the Statute of Limitation (SOL) has run out, you no longer have a legal obligation to pay. For your State's SOL, check the link below. http://www.cardreport.com/laws/statute-of-limitations.html