bad debt and writing off

[Christel]

Sorry, if this is explained elsewhere, I didn't find it quickly.

I came here today to ask a few questions, as I'm not know if I understand some things right when I read the papers:

Does writing off by banks of billions of bad debts mean that developers who were lent money to build unnecassary and often bad housing estates, hotels, office and retail buildings etc, which are now empty and will deteriorate in a few years time in quality, do not have to pay this money they lent back? I can't really believe that this is the right understanding.

How does writing off work?

[diablo]

Sorry, if this is explained elsewhere, I didn't find it quickly.

I came here today to ask a few questions, as I'm not know if I understand some things right when I read the papers:

Does writing off by banks of billions of bad debts mean that developers who were lent money to build unnecassary and often bad housing estates, hotels, office and retail buildings etc, which are now empty and will deteriorate in a few years time in quality, do not have to pay this money they lent back? I can't really believe that this is the right understanding.

How does writing off work?

Are you Sean Dunne in disguise ?

[libertarian-right]

Write-off - Wikipedia, the free encyclopedia
Bad debt - Wikipedia, the free encyclopedia

Some bed time reading :P

[islands]

Sometimes a company/bank will make a general provision for bad debts. That means they feel perhaps 15% of the debts are not repayable, but they're not narrowing it down to which ones. Alternatively, they might make a specific provision against a particular debt, writing it off, effectively. That means they have accepted that the debt won't be paid, but it doesn't mean it's forgiven.

General provisions have not in the past been allowed as a tax deduction, whereas specific provisions have, so there may well have been a tendency to move write-offs which are inherently general in nature into the specific category.

In either case, the debt remains legally binding and due for payment

[Christel]

Sometimes a company/bank will make a general provision for bad debts. That means they feel perhaps 15% of the debts are not repayable, but they're not narrowing it down to which ones. Alternatively, they might make a specific provision against a particular debt, writing it off, effectively. That means they have accepted that the debt won't be paid, but it doesn't mean it's forgiven.

General provisions have not in the past been allowed as a tax deduction, whereas specific provisions have, so there may well have been a tendency to move write-offs which are inherently general in nature into the specific category.

In either case, the debt remains legally binding and due for payment

Thank you all.

So what happens if the debt would be finally paid in relation to it in the banks accounts?

"Alternatively, they might make a specific provision against a particular debt, writing it off, effectively. That means they have accepted that the debt won't be paid, but it doesn't mean it's forgiven."

This sounds a bit like a potential deal between bank and client? Client doesn't have to pay, at least not at that stage, bank gets rax deduction?
What penalties are there for a commercial client who can't pay his loan back?

[islands]

Thank you all.

So what happens if the debt would be finally paid in relation to it in the banks accounts?

"Alternatively, they might make a specific provision against a particular debt, writing it off, effectively. That means they have accepted that the debt won't be paid, but it doesn't mean it's forgiven."

This sounds a bit like a potential deal between bank and client? Client doesn't have to pay, at least not at that stage, bank gets rax deduction?
What penalties are there for a commercial client who can't pay his loan back?

When the debt is finally paid, it comes in as it would before as income, and the provision is reduced. The accounting entry would be
Debit Cash
Credit bad debt provision

The reason it's not a potential deal between bank and client is that there is no sense in which the client "doesn't have to pay" just because the bank/lender has decided in its own private accounts that the chances of getting this money back are remote. The penalties that apply to non-payment are whatever was in the original loan agreement, generally unaffected by any provision the bank might make

That help?

[Christel]

Not yet:

So the client doesn't know whether such special provision is made by the bank re his debt?

[islands]

nope - why should they? In general it wouldn't make sense.

[Christel]

nope - why should they? In general it wouldn't make sense.

Thank you.

[seabhcan]

It depends on the fine print of the agreement between the developer and the bank (and the quality of each's legal team).

Sometimes the developer can walk away clean. Most times they will have all their business assets and sometimes even their personal assets (particularly if they gave a personal guarentee on the loan, which was common) taken. Frequently they will have to file for bankruptcy, which means they will be barred from being the director of a company or taking a loan for 7 years. And they might even be forced to repay installments of the loan for life until either they die or the loan is paid back.

A man I know hung himself last Friday because of debt to RBS. 3 months ago he was a millionaire, by last Friday he was facing total ruin.

Very few developers will walk away from this crisis without pain.