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Accounts uncollectible refers to debts that cannot or will not be repaid. Almost every type of financial or business institution that allows the use of credit in transactions runs the risk of creating accounts uncollectible. Most businesses must develop strategies that help offset the cost of accounts that will never be repaid.
When a person accepts a loan or establishes a company account with another business, he or she is agreeing to pay back the money within a certain time frame. Due to unexpected circumstances, death or permanent disability, market shifts, or fraud, some accounts end up not being repaid. Most governments have channels set up that permit creditors to pursue debtors that do not pay, but some circumstances preclude repayment. If the account or assets of the debtor do not qualify for measures such as wage garnishment, the account may be considered bad debt and be labeled an account uncollectible.
Accounts uncollectible may result from a variety of different circumstances. If a debtor goes bankrupt, some of his debts may end up being discharged, meaning that the creditor can no longer pursue the debtor for full repayment. Even if a debtor in default on debts is gainfully employed, it may be impossible to collect on accounts if he or she is under the poverty level in the region. An account can also end up becoming uncollectible if the debtor has disposable income but the full amount of garnishment or other repayment tactics allowed is already devoted toward debts with a higher priority, such as child support.
There is a general understanding that accounts uncollectible are simply a normal, if frustrating, part of doing business. Just as a retail store is subject to the occasional shoplifter, so almost any type of business may fall victim to the deeds of fraudsters or people relying too much on credit. Since it is an expected cost of doing business, many governments allow businesses to write off a portion of accounts uncollectible on tax forms, which can lead to a reduction of taxes owed.
In addition to taking tax write-offs for accounts uncollectible, some businesses that do a lot of lending choose to obtain credit risk insurance. This type of insurance works similarly to automobile insurance policies: if an account becomes uncollectible, the insurance may be able to cover the losses. Some businesses also choose to create a reserve specifically to cover bad debts, keeping the amount of reserve at an even level with the amount of risk taken.
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