In one sentence
Bad debt is a receivable that will not be collected in full; whether to keep pursuing or write off is decided by three tests — is the debtor still operating, is the debt documented, and is there an enforcement route worth its cost.
Key takeaways
- Bad debt is a receivable that will not be collected in full. Most receivables written off as bad were never worked properly; some that are worked for years were bad from the start.
- Three tests decide: is the debtor still operating, is the debt documented, and does an enforcement route exist that is worth its cost.
- A write-off is a decision, not a defeat — it should be made on evidence, documented, and made early rather than after years of unpaid effort.
- Recovery of a debt already written off is possible and not rare; write-off is an accounting entry, not the end of the claim.
What bad debt means for a business
In accounting, a bad debt is a receivable that has become uncollectible and is written off against profit. In practice, "bad" is a spectrum: a receivable that is late, one that is disputed, one whose debtor has gone quiet, one whose debtor has closed. The business decision is not whether the debt is bad but whether it is recoverable — and at what cost.
How a receivable becomes bad debt
Rarely in a single event. Usually: an invoice ages because nobody owns it; a dispute is left open; a promise is broken and nothing follows; the account team that dealt with the invoice moves on; the debtor learns that this creditor does not act. By the time the receivable is classed doubtful, the debtor's behaviour has been shaped by a year of no consequence. The most expensive bad debts are the ones that were collectable at 60 days.
The three tests
- Is the debtor still operating? A registry and filings check answers this in a day. An entity that has ceased operating with no assets is a write-off with an asset question attached; a functional company is a recovery case however old the debt.
- Is the debt documented? Invoices, purchase orders, delivery proof, statements, acknowledgements. A well-documented old debt is more recoverable than a thin recent one.
- Is there a route worth its cost? A functional company debtor with an undisputed debt above the threshold has a Section 9 route; a cheque on file has a Section 138 route; a written contract has a summary suit. Against each, the cost and time of the route, and the limitation period.
When to keep pursuing
When the debtor is functional and the debt is documented — even if the invoice is three years old and the account team has changed. Directors who are reached directly frequently pay legacy debts they were unaware of; a demand notice with a real route behind it settles more old debts than most businesses expect. Check the limitation period first, and whether an acknowledgement or part-payment has extended it.
When to write off
When the debtor has ceased operating with no reachable assets, when the promoters cannot be traced or have died, when the claim is thinly documented and disputed on the facts, or when the sum is small relative to the cost of any route. Write off on evidence, record the reason, and stop spending. An honest write-off recommendation is worth more than a year of unpaid pursuit — which is why we publish it as a service outcome, not a failure.
Write-off is not the end of the claim
A write-off is an accounting entry. The legal claim survives until limitation runs out, and a debtor who recovers, sells assets, or enters someone else's insolvency can still be pursued. Recoveries against written-off debts are not rare; they are simply never attempted by businesses that treated the write-off as closure.
Provisioning, briefly
Under Ind AS 109 receivables carry an expected credit loss provision based on ageing and history; under the older standard, a provision for doubtful debts. Either way, the ageing schedule that drives the provision is the same schedule that should be driving collection — if the auditor can see the risk, so can the credit head.
If you are outside India
A foreign supplier owed by an Indian company has the same remedies as a domestic creditor, and needs a partner on the ground to run them. How collection and enforcement work for international suppliers — timelines, the Section 9 lever, foreign judgments and awards — is on Debt collection in India for international suppliers.
Sources and regulation
| Instrument | What it does | Source |
|---|---|---|
| Ind AS 109 | Expected credit loss on trade receivables | mca.gov.in |
| Income-tax Act, 1961 — Section 36(1)(vii) | Deduction for bad debts written off in the accounts | incometaxindia.gov.in |
| Limitation Act, 1963 — Section 18 | A written acknowledgement or part-payment extends limitation | indiacode.nic.in |
| Insolvency and Bankruptcy Code, 2016 | Routes against a corporate debtor, functional or in insolvency | ibbi.gov.in |
Thresholds, limitation periods and procedures change. This guide describes the position as generally understood at the time of writing and is not legal advice; confirm the current rule before acting.
If this is your situation: you are deciding whether an old receivable is worth pursuing.
How recovery works