What is considered Bad Debt?

Bad debt refers to amounts owed to a company that are unlikely to be collected. This typically occurs when a debtor is unable or unwilling to pay their obligations, leading the creditor to recognize that the debt is uncollectible.

When debt has been written off and sent to a collection agency, it is officially categorized as bad debt. This process indicates that the creditor has deemed the likelihood of recovery as minimal and has taken formal steps to address the loss by transferring the account to a collection professional. This action signifies a recognition of the debt's bad debt status both for accounting purposes and for reporting to financial stakeholders.

The other options do not fit the definition of bad debt. Paid debts are not bad debts, secured debts still hold value through collateral, and debts expected to be paid soon do not qualify as bad debt because they are presumed collectible. Therefore, the option indicating that the debt has been written off and referred for collection appropriately identifies it as bad debt.