You can theoretically take this as a bad debt deduction, but you have some problem here, where if you were audited, you may not be able to sustain the deduction.
1. In order to claim a bad debt, the interest had to have been included in your income tax returns as short term capital gains. (schedule D). So if you did not, you would have to file amended returns showing the interest as interest income.
2. There had to be an intention of making money with this loan. Between relatives the IRS expects the interest to be at FMV (fair market value), which is about 6%.
3. the IRS expects the loan to be inforceable and the IrS interprets this to mean that: (a) there is a signed loan agreement , and (b) there is a payment schedule that includes interest.
you meet half of this requirement. however, oral contracts are infact enforceable. The courts tend to side with the IRS in this matter because loans between relativeds are generally consdiered to not be fully enforceable because most relatives will not actually enforce a loan against a relative. However in at least two court cases, where the relative who owed the money testified convincingly, the court allowed the bad debt deduction. the saving grace was a written signed and agreed to payment plan.
4. Finally, you can not have an ownership interest except to the extent that the property is being sold as an installment agreement. Essentially if I were setting this up, it would have been to sell my inerterst in the auto for the balance of the money I was providing plus interest in an installment loan document.
5. It is not necessary to go to court to prove a good faith effort to collect on this debt. Please read this link: http://www.irs.gov/taxtopics/tc453.html
BotXXXXX XXXXXne: it looks like you could but you do not have documents. You may have to complete the record in order to take this deduction including filng of amended tax returns to claim interest income. You would have some issues to overcome if you were to be audited.