1. Legal term

In the sense of § 3.1 (10) of the Hungarian Act on Accounting, so called "bad debts" are debts, that

  1. can not be recovered by means of an execution procedure totally or in part
  2. has been cancelled by the debtor in the course of liquidation procedures
  3. is not covered according to the written certificate of the liquidator
  4. is not satisfied in liquidation procedures after distribution of the assets
  5. are indebted by a debtor who can not be located at his seat, or the execution costs of which would exceed the debts
  6. can not be enforced in legal proceedings
  7. have expired.

2. Documentation of bad debt status

According to the present regulations valid from January 01, 2005 in each and every case, the bad debt nature of a debt has to be substantiated and documented accordingly.

In the practice of the tax authority (Tax question 1998/69), it has been established that in case of debts of companies the following may serve as proper documentation of the debt being a bad debt:

  1. The company has been deleted from the company's registry; in this case, the decision of the Registry Court is to be obtained.
  2. In the sense of the above Item 1 (e) debtors, that can not be located at their seat, the letters sent to them are returned with the mark "addressee" unknown.

    In this case, the company may initiate deletion proceedings against the indebted company at the Registry Court, in which case again the decision of the Registry Court is accepted as proof of the bad debts status.

    Please note that a returned letter with the mark "addressee unknown" is in itself insufficient (Tax question 5/1996). The tax office always requires an official, independent verification of a public body (e.g. in case of a company, the company registry, or, in case of a natural person, for example the municipality stating that the person has never been a resident there, and so on) confirming, that the debtor can not be located.
  3. In the course of execution proceedings, if the executioner declares in writing, that the debtor can not be found.

3. Writing-off of bad debts

According to § 65 (7) of the Act on Accounting, bad debts may not be shown in the balance sheet but need to be set-off accordingly as credit related losses.

Thus, there are two different groups of debts:

  1. The "bad debt" nature of which is proven and documented as set forth in Item 1. These are to be written off. Partially bad debts can be written off as well, to that extent.
  2. Debts, which can not be documented as bad debts, are to be shown in the balance sheet and can not be written off.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.