What is Bad Debt?
Money owed to your business that is unlikely to be collected and must be written off as a loss.
Definition
Bad debt is a receivable (money owed to you) that you have determined cannot be collected. This can happen when a client refuses to pay, has gone bankrupt or out of business, has a genuine dispute over the quality of work, or has simply disappeared. Once you have exhausted all reasonable collection efforts, the bad debt is written off — meaning you remove it from your accounts receivable and record it as a loss on your income statement.
How Bad Debt Occurs
Freelancers encounter bad debt in several situations: a client suddenly disputes the quality or scope of work and withholds payment; a startup client runs out of funding before paying outstanding invoices; a client goes bankrupt or enters liquidation; a client intentionally defrauds the freelancer by disappearing after the work is done; or international clients face currency controls or legal barriers to payment. The most common cause is the last one — clients who simply stop responding to invoices after the work is delivered.
Preventing Bad Debt
Prevention is more effective than collection. Key strategies include: always get a signed contract or work order before starting significant work; require an upfront deposit (25–50%) for new clients or large projects; use clear payment terms and late payment penalties in your contract; invoice promptly and follow up consistently on overdue invoices; check new client references and creditworthiness for large engagements; and consider using escrow services or milestone-based payments for high-risk transactions.
Writing Off Bad Debt
When a debt is confirmed uncollectible, you formally write it off. This involves: documenting all collection attempts (dates, emails, letters sent); making a final written demand or using a collections agency; removing the invoice from your accounts receivable; and recording the write-off as a bad debt expense on your income statement. For US freelancers on the accrual basis, the write-off may partially offset the income you previously reported on that invoice for tax purposes.
Bad Debt vs. Dispute
Not every unpaid invoice is bad debt. A client dispute — where the client claims the work was not delivered as agreed — is a different situation. Before writing off a debt, ensure you have clearly documented the original agreement, your communications, and the deliverables. If a dispute is genuine, try to resolve it through negotiation or mediation. If the client is acting in bad faith, you may have legal recourse through small claims court or a professional association arbitration service.