In theory in a properly managed recovery from a recession bad debt is eliminated via loan restructuring and new more productive debt is created to replace it. And income insurance programs[1] are used to support demand. Austerity during a recession works poorly because instead of replacing unproductive debt with new more productive debt, austerity attempts to subsidize the owners of bad debt by taxing demand.

[1] Unemployment insurance, welfare, state run retirement, pensions, etc.