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Warning
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Simple English definitions for legal terms
bad debt
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A quick definition of bad debt:
Bad debt is when someone owes money to another person or company, but they can't or won't pay it back. This can happen for many reasons, like if the person who owes the money goes bankrupt or disappears. When a company has bad debt, it can be really bad for them because they lose money. To help companies deal with bad debt, the government lets them take it off their taxes. But for regular people, it's harder to get help with bad debt.
A more thorough explanation:
Bad debt is a type of debt that a creditor cannot recover. This can happen for many reasons, such as when the debtor is insolvent or unable to pay back the loan. In the business world, bad debt can be a serious problem that can hurt a company's finances. To help businesses deal with bad debt, the government allows them to write off bad debt from their taxable income.
For example, let's say a company lends money to a customer who later goes bankrupt and cannot pay back the loan. This would be considered bad debt for the company.
Non-business related bad debt can also be a problem for individuals. However, the rules for deducting bad debt on personal taxes are very strict. The bad debt must be completely worthless, and there are limited tax deductions available.
Overall, bad debt is a risk that creditors take when lending money. It's important for businesses and individuals to manage their finances carefully to avoid bad debt and its negative consequences.