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Last edited 23 Mar 2022
A debt is a sum of money that is owed by or due from a debtor to a creditor. A bad debt is a debt which a creditor realises will never be repaid, and which the creditor is not willing to embark on legal processes to retrieve. The loan is typically ‘written off’ ie, it is assumed lost forever, never to be received.
Such a state of affairs may occur, for example, when the debtor is a company that has gone, or is about to go, into liquidation, or a heavily-indebted individual passes away. The term ‘insolvency' describes the inability of a debtor to pay its debts. In the United Kingdom, insolvent individuals are made 'bankrupt', while companies are put into 'liquidation' or 'administration'.
The precise definition of what constitutes a bad debt will depend on the country in which it exists.
NB Cash flow is an issue for the construction supply chain, and is a common reason for contractors and sub-contractors becoming insolvent. This can be catastrophic for a project in terms of time and money. For more information see: Cash flow.
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