Bad Debt Expense - How Does this Work

Bad debt expense should only be used once the debt is noncollectable.

This is how I would handle your situation.

Homeowner owes $11K. First, there should be a lien to protect the HOA. If the home is foreclosed on by the bank or the homeowner declared bankruptcy and the sale of the home only paid off certain creditors, then the balance would be written off as a bad debt. I would have this on the agenda for the Board to vote on, I would never do on my own. Once written, you can give to a collection agency and see what they can get. You may get something for their efforts, but something is always better than nothing.

Two things:

First, if your management company isn't doing a good job of explaining what bad debt is and how it impacts your budget, the manager doesn't know what it is either and is winging it, or something else is going on - I don't like it at all when property manager cannot or refuse to answer questions about the client's budget or anything else related to the association. You might want to ask who prepares your income/expense reports and have that person attend a meeting to explain all this. If the mumbling and non answers from the property manager continue, you might also want to think about getting another one.

Second, I think board approval is appropriate when writing off bad debt - our board always made a motion to write off accounts that would be added to the bad debt line item in the budget. When it shows up in the budget you total the association's income then subtract the bad debt. That number is a more accurate figure showing how much the association is really working with. When I took seminars from the community association institute (CAI) it often recommended that you keep the bed debt figure to 4% or less of the annual budget.

Every other year or so, we'd look at the bad debt line item against the collection activity and see if the number needed to be increased (along with changes to our collection policy to keep delinquencies from getting out of hand in the first place). It CAN be confusing to understand business accounting (which is what this is), so I suggest education. CAI has some useful education materials on budgeting and assessment collections that are designed for new and experienced board members, so you and your colleagues should take a look and invest in a few. Or have your association accountant attend a meeting or two (maybe three) and give you an overview of your budget.

Old post.

Helpful hint - when you scroll through various pages on this website and see a topic you're interested in, please note the date of the original post. If you have a question related to that issue, it's best to start a NEW conversation because things change year to year in HOA land, and what was helpful 2 years ago (or even six months ago) could have changed.