Bad Debt: What It Is and How to Reduce It

The line isn’t about how many days have passed — it’s about whether collection is still realistic. An invoice becomes bad debt when the client is unresponsive despite repeated attempts, has gone out of business, disputes the debt without resolution, or when further pursuit costs more (in time or money) than the invoice is worth.

A few patterns tend to show up before an invoice becomes genuinely uncollectible:

• A client who has started missing or delaying payments on prior invoices, not just this one
• Repeated excuses without a concrete payment date attached
• Reduced responsiveness compared to earlier in the relationship
• Public signals of financial trouble — layoffs, closures, other vendors reporting the same issue

The most effective prevention happens before the invoice is even sent: requiring a deposit on larger jobs, running a basic credit or reputation check on new clients, and using shorter payment terms for anyone without an established payment history all reduce your exposure if a client can’t or won’t pay.

For existing clients, tightening terms — smaller ongoing engagements, deposits, or Due on Receipt — after the first late payment prevents a pattern from turning into a total loss.

Once you’ve reasonably concluded an invoice won’t be collected, writing it off clears it from your active accounts receivable and stops it from distorting your view of expected cash flow. Keep records of your collection attempts — they’re often needed for tax purposes and useful if the client’s situation changes later.

In many places, bad debt from unpaid invoices can be deducted or accounted for in a way that reduces the tax impact of the loss, but the specific rules depend on your accounting method and jurisdiction. Check with a local accountant before assuming a specific treatment applies to your situation.