What are bad debts? Most of us would have come across this term at some point of time. Bad debt literally refers to the debt or the money owed by someone which has lesser or no chance of being recovered. This term is mostly found on the balance sheets of companies and banks. In companies they usually have an allowance for bad debt because there is no assurance that the bad debts can be recovered.
The banks also have bad debts where the banks major income will be from the interest on loan be it personal loan, commercial loans or any other loans, interest on credit cards, bank charges etc. Sometimes the borrowers get into a situation where they are unable to pay the interest on loans or the extra charges that they ought to pay the bank. Bad debts of banks can sometimes cause even huge banks to get collapsed. A debtor with a history of bad debts will end up with a fall in their credit rating which will later become an obstacle for receiving any form of credit.
Bad debts not only cause trouble to the lender but it also affects the borrower in many ways.