Bad debts are considered to be those debts that are
unlikely to be repaid. There are two types of bad debts in
case 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. Example of 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 allow acquiring
a job The income increases simple interest being charged.