Bad Debt: When to Write Off an Unpaid Invoice

Not every unpaid invoice is worth continuing to pursue. At some point, the time and cost of collecting exceeds what's actually owed. Recognizing that point, rather than chasing indefinitely, is a normal, unremarkable part of running a business.

Recognizing when to stop

A few signals suggest it's time to write an invoice off rather than continue pursuing it:

• The cost of pursuing it exceeds the amount owed. A collections agency's cut, legal fees, or simply your own time can make further effort a net loss even if you'd technically "win."
• The client is genuinely insolvent. They are bankrupt, dissolved, or otherwise unable to pay regardless of what pressure is applied.
• You've exhausted the reasonable steps. Follow-up, a collection letter, maybe a collections agency or small claims attempt have all failed, and further escalation isn't realistic for the amount involved.
• The client cannot be found. Emails bounce, the phone is disconnected, and the address is no longer valid.

There's no universal dollar threshold. It's a judgment call weighing the specific amount against the realistic cost and odds of recovery.

Worked example: should you keep chasing?

A freelancer is owed $1,800 on an invoice 120 days overdue. The options:

• Collections agency at 30% commission: recovers $1,800 × 0.70 = $1,260 if it succeeds. If the agency collects in 40% of cases, the expected value is $1,260 × 0.40 = $504.
• Small claims court: filing fee of $75, plus about 6 hours of your time. If your time is worth $50 an hour, that is $300. Total cost $375. If your chance of winning and collecting is 60%, expected recovery is $1,800 × 0.60 = $1,080, minus $375 = $705.
• Write-off: $0 recovered, but no more time spent.

In this example small claims comes out ahead, because the debt is well documented. With a $300 invoice, the same costs would wipe out the gain, and a write-off would be the sensible call. The probabilities here are invented for illustration; use your own honest estimate.

Measuring bad debt over time

One bad debt is a cost. A pattern is a signal. Calculate the bad debt percentage:

Bad debt % = Bad debts written off ÷ Total credit sales × 100.

If you wrote off $3,600 against $240,000 of credit sales, that is 1.5%. Our bad debt percentage calculator does this directly. Track it yearly. If it rises, look at who you are extending credit to.

What "writing it off" actually means

Writing off a bad debt means removing it from your accounts receivable as money you still expect to collect. You're not pretending the client doesn't owe it. You're acknowledging that continuing to count it as an asset on your books no longer reflects reality. This is a bookkeeping matter and, in many jurisdictions, a tax matter. Many places allow bad debt to be deducted or to be relieved of tax already accounted for, but conditions differ a lot between the US, UK, EU countries and elsewhere. Check with an accountant familiar with your local rules.

Step by step: writing off an invoice

1. Confirm you have tried reasonable collection steps and keep a log of dates and responses.
2. Check the invoice is not disputed. A disputed invoice may need a credit note instead.
3. Decide the amount to write off (full or partial).
4. Record the write-off in your books, or ask your bookkeeper to do it.
5. Keep the original invoice, your follow-up log, and any correspondence on file.
6. Mark the client account so future work needs upfront payment or a deposit.

It doesn't mean you can't still collect

Writing an invoice off for accounting purposes doesn't waive the debt or prevent you from pursuing payment later if circumstances change, such as the client's finances improving. It's a statement about how you're recording it now. If a written-off debt is later paid, record it as income when it arrives, and ask your accountant about any tax effect.

Common mistakes

• Writing off too early. Some invoices are only late, not lost. Follow your follow-up timeline first.
• Writing off too late. Carrying a 2-year-old invoice as an asset overstates your position.
• Using a write-off to settle a dispute. A dispute should be resolved with a credit note or an agreed change, so the paper trail is clear.
• Not learning from it. Every write-off should prompt a question: what warning sign did we miss?

Prevention matters more than the write-off itself

A rising bad debt percentage is a signal worth investigating. Are you extending credit to clients who shouldn't have received it? Is the process for catching problems early, as set out in reducing late payments, working as it should? Deposits (see invoice deposits) and clear collection steps lower the risk before it appears.

Writing off a debt isn't a failure. Continuing to carry an invoice you realistically won't collect, and treating it as an asset it no longer is, is the actual mistake.

FAQ

How long should I wait before writing off an invoice?

There is no fixed rule. Many small businesses review invoices older than 90 days and decide at 120 to 180 days. Local tax rules may set their own conditions, so ask your accountant.

Can I deduct bad debt from my taxes?

Often yes, but the conditions vary by country and by whether you use cash or accrual accounting. Under cash accounting you may have nothing to deduct, because you never recorded the income.

Is bad debt the same as a doubtful account?

Not quite. A doubtful account is one you expect may not be paid, and some businesses set aside an allowance for it. Bad debt is one you've decided will not be paid.

Should I tell the client I've written it off?

Not necessarily. A write-off is an internal accounting entry. Only tell the client if you have formally agreed to forgive the debt, and do that in writing.