In finance, the term bad debt refers to debt which cannot be collected. The term is primarily used to denote debt in the form accounts receivable or notes receivable which is uncollectable.
Bad debt results in a loss for the lender. It may occur when a borrower goes bankrupt, loses all or part of their income, or hides their assets in certain financial instruments so as to make them impossible to collect. When the cost of collecting a debt is higher than the debt itself, it may also be written off as bad debt.
Example: An investor buys a debenture worth 10,000 Swiss francs from an investment company. Shortly afterwards, the investment company declares bankruptcy. After multiple unsuccessful attempts to collect the debt, the investor stops attempting to reclaim the debt and simply writes off the 10,000 francs as bad debt. This results in a capital loss of 10,000 francs.
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