Bad Debt

2007-03-08 10:33:40

( Financial )



WHAT IS A BAD DEBT?
A bad debt is an uncollectible debt. When you are unable to collect a debt that is due and demandable, despite all efforts, and a significant length of time has passed, the debt in your favor has become a bad debt.

HOW DO WE DETERMINE WHEN A BAD DEBT EXISTS?
Some cases are black and white. If you are unable to find your debtor, and he has no property, agents, or any office left behind, then you have absolutely no remedy. Other cases are naturally not so simple. Sometimes the debtor is just difficult to collect from, refusing, for instance, to pay on time. This is not yet a case where a bad debt exists. It is necessary that a length of time pass, and that there be consistent failure to collect the debt.

UNSECURED DEBTS versus SECURED DEBTS
Unsecured debts are usually the most prone to becoming bad debts. Typically, a loan may be granted and property may be pledged or mortgaged in favor of the lender. In case of non-payment, the property pledged or mortgaged can be used to satisfy the debt. These are called secured debts. Unsecured debts are the opposite- and the danger to the lender is quite obvious. With no immediate recourse to a form of collateral, the lender will be forced to go to court to enforce their claim. This is expensive and time consuming.

BAD DEBT COLLECTION- THE ART OF SQUEEZING BLOOD FROM ROCKS
Bad debt collection is not the sloppy collection of debts, as the term may imply. Bad debt collection is a service provided by private agencies that specialize in finding ways to collect debts believed to be uncollectible. They will look for debtors who have absconded. They will sniff out property that may have been hidden in fraud of creditors. Your bad debts, in the hands of a skilled bad debt collection agent, may yet become partially or wholly recoverable.

THE SILVER LINING IN BAD DEBT CLOUDS
Bad debts are certainly a blow to businesses. Business bad debts impede cash flow and stagger company growth. However, in many places, these business bad debts are tax deductible. The rules of deductibility will vary from place to place, but at least, when a debt cannot be collected, the shock to a company's cash flow can be cushioned by the allowable tax deductions.


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