Bad Debt

By Daisy Rogozinsky
/
May 31, 2022

There are many kinds of debt involved in lending, accounting, and bankruptcy. In this article, we’ll define the terms bad debt, bad debt expense, bad debt recovery, allowance for bad debt, nondischargeable debt, secured debt, and unscheduled debt. 

Key Takeaways

  • Bad debt is a type of expense that occurs after repayment by a customer is no longer considered to be collectible
  • Bad debt expenses are how businesses account for bad debts in their books
  • Bad debt recovery is a payment received for a debt that was written off as uncollectible
  • Allowance for bad debt is a valuation account used to estimate the number of a firm’s accounts receivable that may not be collectible
  • Nondischargeable debt is debt that cannot be discharged even if the debtor files for bankruptcy such as child support payments
  • Secured debt is debt secured by a collateral to protect the lender if the debtor defaults
  • Unscheduled debt is debt that the debtor should have listed in his or her bankruptcy schedule but did not 

What Is Bad Debt?

Bad debt is an expense incurred by a business when the repayment of credit previously extended to a customer is considered uncollectible and can be recorded as a charge-off. It is a contingency that all businesses that extend credit to customers must account for, as there is always a risk that payment will not be made. 

What Is Bad Debt Expense and Recovery?

Bad debt expenses are the way businesses account for a receivable account that will not be paid either because the customer cannot pay or chooses not to pay. This may be because the customer cannot afford to pay or because they disagree about the product or service they were sold.

Bad debt recovery is a payment received for a debt that was written off as uncollectible. Bad debt recovery can be in the form of a loan, a line of credit, or any other accounts receivable. Because it generates a loss when written off, bad debt recovery usually produces income. Bad debt recovery credits the allowance for bad debts and reduces the accounts receivable category. 

What Is Allowance for Bad Debt?

Allowance for bad debt, also known as allowance for doubtful accounts, is a valuation account used to estimate the number of a firm’s receivables that may not be collectible. Allowance for bad debt is used because the face value of a company’s total accounts receivable is not the actual balance that is ultimately collected. When a borrower defaults on a loan, the allowance for a bad debt account is reduced from the book value of the loan. 

What Is a Nondischargeable Debt?

Nondischargeable debt is a type of debt that cannot be discharged, meaning that the debtor will still owe it to his or her creditors even if they file for bankruptcy. Nondischargeable debts include:

  • Student loans
  • Taxes
  • Domestic support
  • Fines
  • Restitutions
  • Personal injury
  • Debts not listed in bankruptcy schedules (unscheduled debt)

What Is a Secured Debt?

Secured debt is debt secured by a collateral to reduce the risk of lending. If a borrower of a loan defaults on paying it, the creditor can seize the collateral, sell it, and use it to pay back the debt. This protects the lender from bad debt. In the event of a company going bankrupt, secured lenders are paid back before unsecured lenders. 

Types of collateral include:

  • Homes
  • Cars
  • Inventory
  • Cash
  • Blanket liens

What Is an Unscheduled Debt?

Unscheduled debt is debt that should have been listed in a debtor’s bankruptcy schedule but was not. Depending on the circumstances, an unscheduled debt may or may not be dischargeable.

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