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Debt which is unlikely to be repaid and which the creditor is unwilling to collect
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In finance, bad debt, occasionally called uncollectible accounts expense, is a monetary amount owed to a creditor that is unlikely to be paid and for which the creditor is not willing to take action to collect for various reasons, often due to the debtor not having the money to pay, for example due to a company going into liquidation or insolvency. A high bad debt rate is caused when a business is not effective in managing its credit and collections process. If the credit check of a new customer is not thorough or the collections team isn't proactively reaching out to recover payments, a company faces the risk of a high bad debt. There are various technical definitions of what constitutes a bad debt, depending on accounting conventions, regulatory treatment and the institution provisioning. In the United States, bank loans with more than ninety days' arrears become "problem loans". Accounting sources advise that the full amount of a bad debt be written off to the profit and loss account or a provision for bad debts as soon as it is foreseen.

Doubtful debts are those debts which a business or individual is unlikely to be able to collect. The reasons for potential non payment can include disputes over supply, delivery, the condition of the item, or the appearance of financial stress within a customer's operations. When such a dispute occurs, it is prudent to add this debt or portion thereof to the doubtful debt reserve. This is done to avoid over stating the assets of the business as trade debtors are reported net of doubtful debt. When there is no longer any doubt that a debt is uncollectible, the debt becomes bad. An example of a debt becoming uncollectible would be: once final payments have been made from the liquidation of a customer's limited liability company, no further action can be taken.

Also known as a bad debt reserve, this is a contra account listed within the current asset section of the balance sheet. The doubtful debt reserve holds a sum of money to allow a reduction in the accounts receivable ledger due to non collection of debts. This can also be referred to as an allowance for bad debts. Once a doubtful debt becomes uncollectible, the amount will be written off.

Some types of bad debts, whether business or non business related, are considered tax deductible. Section 166 of the Internal Revenue Code provides the requirements for which a bad debt to be deducted.

Section 166 limits the amount of the deduction. There must be an amount of tax capital, or basis, in question to be recovered. In other words, there is 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 (non business of business).

Nonbusiness bad debts are all other debts that are not business bad debts. To deduct a nonbusiness bad debt, it has to be completely worthless. A debt becomes worthless when it is reasonable to believe it will never be repaid after you have taken the steps to collect it. The deduction can only be taken in the year that the debt is determined to be worthless. Most owners of junior (2nd, 3rd, etc.) fall into this when the 1st mortgage forecloses with no equity remaining to pay on the junior liens. There is one option available for mortgages not available for the business debt: donation. The difference is that a valuation of $10,000 can be taken without an appraisal. An appraisal may be able to increase the value to more and must be based on other similar mortgages that actually sold, but generally it is less than the face value. The real difference is that as a donation the amount of deduction is limited to up to 50% of adjusted gross income per year with carryovers taken over the next five years. This is because the deduction is now classified as a donation instead of a bad debt write off and uses Schedule A instead of Schedule D.