Bad debts are considered to be those debts that are unlikely
to be repaid. There are two types of bad debts (in terms of asking for deductions
in the tax returns):
- A business bad debt
- Non - business bad debt
A business bad debt comes from a trade or a business. It
can be deductible only when it is included in the business income.
All other bad debts are non business. For example it can be a personal loan
made to someone. Non business bad debts are worthless to be deductible unless
reasonable steps have been taken to collect the debt, like going to the court
and sending demand letters. A debt can only become worthless when there is
no further chance of the amount to be paid back. A debtor who has declared
bankruptcy proves a
loan to be worthless.
Some examples of bad debt
- Debt accumulated on items which do not increase in value over time.
- The interest is charged over time in the debt that increases the cost of
the product two to three times the original value.
- Debts which charge compound interest are examples of bad debt.
- Bad debts decrease the value of goods and services over a period of time.
Some examples of good debts
- Debts which are gathered on goods and services that increase in value over
a period of time are examples of good debt.
- Debts which charge simple interest and not compound interest are examples
of good debt.
- Some examples of good debt are home loans and school loans.
- If it is not difficult for the employer to acquire the payments which are
bearable, they are good debts because most homes increase in value over a
period of time.
- School loans are good debts because they help is acquiring a job. The income
increases simple interest being charged.
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