# Bad Debt

Bad debt in a lending market means that the value of collateral assets is insufficient to recover the outstanding debt upon liquidation. The largest onchain lending markets like Aave, Compound, and MakerDAO have no way to account for bad debt, leading to bank run risk.

On Credit v1, any bad debt is immediately marked down upon the conclusion of a [liquidation](https://credit-guild.gitbook.io/introduction/key-concepts/broken-reference) auction, ensuring a fair outcome among lenders.
