Bad Debt

What is bad debt?

Bad debt is money you're owed but realistically won't receive. It happens when clients refuse to pay, go out of business, disappear, or simply can't afford to settle their invoices despite your collection efforts.

For contractors and service providers, bad debt represents work you've already completed but won't be compensated for—a direct hit to your bottom line.

When does debt become "bad"?

There's no exact rule, but debt is typically considered bad when:

• The invoice is significantly overdue (often 90-180 days)
• The client has stopped responding to all contact attempts
• The client has declared bankruptcy or gone out of business
• The cost of collection would exceed the amount owed
• You've made reasonable collection efforts without success

Handling bad debt

When debt becomes uncollectible, you can write it off—removing it from your accounts receivable and recording it as a business expense. This reduces your taxable income (consult your accountant for proper procedures). To minimize bad debt, consider requiring deposits upfront, running credit checks on large projects, and following up promptly on overdue invoices.