Bad debts are those debts that are unlikely to be repaid. Good debts are those that increase in value over time, like a home or student loan. There are 2 types of bad debts: Business debt and Non-business bad debts.
- A business debt: It is a debt you incur to help you make money, like if you own your own business. These are deductible only when they are included in business income on a Schedule C.
- Non-business (personal) debt: These are debts you incur to buy stuff for yourself like clothes, food, a home, or a car.
Non-business debts become bad debts when you stop paying on them. In order to collect on them, the creditor has to take steps in order to collect on them, like going to court or sending demand letters. If you declare bankruptcy, the debt often proves to be worthless.
- Debt accumulated on items that decrease instead of increase in value over time.
- Interest is charged that increases the cost two to three times the original value.
- Debts which charge compound interest.
- Debts that increase in value over time.
- Debts that charge simple and not compound interest.