Causes of Uncollectible Debt

• Uncollectible debt can be caused by a number of things, including disappearance of the debtor, collateral used to secure the loan being destroyed, bankruptcy, or just plain insolvency on the part of the debtor.
  
  

Determining Uncollectible Debt

• The final determination of whether a debt is uncollectible or bad can be a lengthy and complex process. A significant amount of time must pass, and the statute of limitations (the length of time that collection for the debt can be pursued in a court of law) must have passed. And often, each and every legal and civil recourse and effort must have been attempted and exhausted.
  
  

Tax Implications

• A business owner who has established bad debts on record can deduct those debts from his taxes. However, this is true only for businesses, in which the debtor's declaration of bankruptcy is often sufficient to establish the debt as uncollectible.
  
  If the uncollectible debt is a personal debt, proving it is a bad debt is much more difficult. The lender must have documented evidence of having attempted to recoup the money in court and through certified demand letters.
  
  

Consequences for the Debtor

• Uncollectible debt can have a drastic negative impact on the debtor's credit ranking. Subsequently it can lead to collateral damage in almost every area of life, ranging from difficulty securing a housing lease to, in some cases, even difficulty obtaining employment.
  
  

Considerations

• Like all financial law, uncollectible debt is subject to many state and federal regulations and guidelines. It is especially advisable for businesses to consult a financial adviser, and possibly an attorney, for guidance on how to properly establish and write off uncollectible debt.