What is Bad Debt?

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  • Written By: Garry Crystal
  • Edited By: Niki Foster
  • Last Modified Date: 06 September 2019
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Bad debt can cover a wide variety of definitions. The most common meaning is money owed which is unlikely to be recovered. This form of bad debt may be written off by a company or may ultimately lead to the person with bad debt finding himself unable to gain anymore credit.

Many companies have a bad debt allowance, as it is unlikely that all bad debt will be recovered. Companies make an estimate of the bad debt that may be incurred within a current time period. This estimate is based on past records and used in the process to estimate overall earnings.

Major banks have a strange way of looking at bad debt. A bank can make a profit of 10 billion US dollars (USD) while stating that they have 4 billion USD in bad debt. Most of a bank's profit is made from the interest on loans, credit cards and bank charges from their customers. If a customer falls into debt with a bank, the interest payments and late charges make the bank money. It seems to be in the bank's interest to have customers who eventually end up with bad debt.


If a person falls into debt, it can sometimes be extremely difficult to climb out. Credit card payments, mortgage payments and loan repayments can spiral out of control. If they are not dealt with, the results can cause extreme worry, break up families and end in bankruptcy or imprisonment. Regardless of this, banks and other lending establishments continue giving high interest credit cards and loans to people who have seriously bad debt, compounding the problem.

If you find yourself in debt, there are a number of avenues available in order to find help. Do not under any circumstances bury your head in the sand and hope the problem will go away. There are debt counseling and debt consolidation companies that will do their best to help with your problem.

You can work towards financial freedom by consulting these companies on ways of reducing your monthly payments. Some of these companies charge a fee, but many are run with government approval or are voluntary. Most communities have their own debt counseling offices, and it is best to approach them before trying anyone else.

Beware of companies that advertise on television or in newspapers. They are there to make a profit from your bad debt situation and may not be regulated financial advisors. They may end up doing more harm than good to your credit score. Remember, these firms have to recoup their advertising costs somewhere, and it is usually at the expense of the customer. If a company makes promises that sound too good too be true, they usually are.


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