Bad debt refers to debt such as a loan or advance that a creditor can no longer recover. A debt cannot be recovered for a variety of reasons such as insolvent debtors. In the corporate context, bad debt can be a critical blow to businesses, and to reduce the impact on a corporation from bad debt and encourage continued lending from businesses, the government allows corporations to write-off bad debt from their taxable income. Non-business related bad debt can be treated as a short-term capital loss which allows limited tax deductions, but the bad debt must be completely worthless. Also, personal debts have very strict standards for achieving bad debt deductions.
[Last updated in June of 2021 by the Wex Definitions Team]