What Does Writing Off a Bad Debt Mean?

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Writing off a bad debt refers to a collector who discontinues his or her efforts to collect the debt and writes it off, which creates a tax disadvantage for the person who owed the money. Understand what a debt write-off is with advice from a licensed financial planner in this free video on personal finance.

Part of the Video Series: Debt & Debt Consolidation
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Video Transcript

Hi, my name is Bill Rae. I'm with HBW of Florida, and I have been in the finance field for well over twenty years. Today, we're going to be talking about, what does it mean to write off debt? Well, that's an interesting topic, it could take many hours, but I'm going to try and simplify it by assuming that you're talking about a business writing off debt. Let's say that you owe me money, and I've been attempting to collect. After a certain period of time, I may decide that it's not worth my effort to continue to collect from you. So I will write off, or take you off my books, and no longer attempt to collect from you. I will be able to take a tax advantage for this. However, you should be aware that if you're the receiving end of a debt writing-off, there could be tax consequences for you. The IRS is very aware of what you were supposed to pay, and what forgiveness you are getting. They take an attitude that, that's income you owe on. So, for some, writing off a debt might have a good tax advantage to them. The receiving end, however, may end up paying that tax. So, if that's what you're talking about, writing off a debt, that's just as simple as I can get it. My name is Bill Rae. I'm with HBW, and I'm helping you build wealth.

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