A bad debt recovery is a payment received after it has been designated as uncollectible. This may occur after legal action has been taken to recover a receivable, as a partial payment from a bankruptcy administrator, or some similar situation. It could also arise simply because an invoice was written off too soon, before all possible collection alternatives had been explored.
A bad debt recovery can also come from the sale of a creditor's collateral. For example, a lender might repossess a car after a borrower on a car loan has been delinquent in making payments. The lender sells the car, and the proceeds from the sale are considered a bad debt recovery.
The accounting for a bad debt recovery is a two-step process, as follows:
- Reverse the original recordation of a bad debt. This means creating a debit to the accounts receivable asset account in the amount of the recovery, with the offsetting credit to the allowance for doubtful accounts contra asset account. If the original entry was instead a credit to accounts receivable and a debit to bad debt expense (the direct write-off method), then reverse this original entry.
- Record the cash receipt from the bad debt recovery, which is a debit to the cash account and a credit to the accounts receivable asset account.