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bad debt

n. an uncollectible debt. The problem is to determine when a debt is realistically dead, which means there must be some evidence of uncollectibility or a lengthy passage of time. Discharge in bankruptcy, the running of the statute of limitations to bring a lawsuit, disappearance of the debtor, a pattern of avoiding debts or the destruction of the collateral security can all make a debt "bad." For income tax deduction purposes such a debt in business is deductible against ordinary income (found in federal income tax Form 1040 Schedule C) and such a personal debt is deductible against short-term capital gains. A debt due for services rendered is not a bad debt for tax purposes, since there is just no income on which to be taxed.

The People's Law Dictionary by Gerald and Kathleen Hill Publisher Fine Communications