Bad Debt

What is bad debt?

Bad debt is money a client owes you that you've determined you'll never collect. Despite your best efforts—reminders, phone calls, maybe even collection attempts—some invoices simply won't get paid. When you accept that an invoice is uncollectible, it becomes bad debt.

Bad debt is an unfortunate reality of doing business, but tracking it properly matters for your taxes and financial records.

When does debt become bad?

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

• Extended non-payment — The invoice is 90-180+ days overdue with no response
• Client disappeared — You can't reach them despite multiple attempts
• Client bankruptcy — The client has filed for bankruptcy
• Dispute with no resolution — A legitimate dispute that can't be resolved
• Cost exceeds value — Pursuing payment would cost more than the debt is worth

Writing off bad debt

When you write off bad debt, you remove it from accounts receivable and record it as an expense. This reduces your taxable income—you shouldn't pay taxes on money you never received. Keep documentation of your collection efforts in case of audit.