# Bad Debt Risk ## Definition Bad debt emerges when a borrower's collateral cannot be liquidated for enough value to fully repay the outstanding debt. The shortfall between liquidation proceeds (minus execution costs) and outstanding obligations becomes the bad debt burden. ## Triggers * Swift collateral value declines exceeding liquidation speed * Market depth deterioration causing substantial slippage during asset sales * Liquidations becoming economically unviable due to fees, MEV, or thin liquidity * Network disruptions preventing timely liquidation or inflating transaction costs ## Loss Distribution Bad debt typically affects lenders through socialized losses across liquidity providers rather than concentrating on single parties. This reduces total available assets or diminishes realized yields. ## Mitigations Fira employs liquidation thresholds and exposure caps using conservative, data-informed methodologies based on historical price volatility and execution data. ### Limitations * Extreme price gaps can bypass protections * Sudden liquidity disappearance * Oracle failures * Smart contract issues ## Key Risk Lenders face credit-like risk comparable to borrower defaults, with losses most likely during stress periods when market volatility peaks and liquidity contracts simultaneously. --- # Agent Instructions: Querying This Documentation If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question. Perform an HTTP GET request on the current page URL with the `ask` query parameter: ``` GET https://docs.fira.money/security-and-risk/risk-framework/bad-debt-risk.md?ask= ``` The question should be specific, self-contained, and written in natural language. The response will contain a direct answer to the question and relevant excerpts and sources from the documentation. Use this mechanism when the answer is not explicitly present in the current page, you need clarification or additional context, or you want to retrieve related documentation sections.