Receivables. Owners who, for whatever reason, stop paying their assessments create a burden on the association. Because they are not contributing to the budgeted income for the association, the board may not have sufficient monies to pay the association's bills. As a result, the board is forced to either (i) reduce expenses, (ii) impose a special assessment to cover the lost income, or (iii) carry the losses into next year's budget and increase annual dues to cover the loss.
Bad Debt Defined. Assessments (regular and special) which are unlikely to be repaid, either because the debtor doesn't have any money or because the debtor cannot be found, are classified as "bad debt."
Write-Off. Associations may eventually recoup delinquent assessments through their collection efforts. In some instances, the debt is uncollectable. Rather than carry the delinquent amounts on their books, associations should write-off the receivable as "bad debt." During periods of economic downturns, some associations include a line item in their annual budget for estimated bad debt. This has the effect of increasing the assessments on all owners but allows the association to pay its operating expenses without imposing special assessments. Bad debts appear as an expense on the association's income statement.
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