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Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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We loaned the owner of a restaurant $150,000.00 in 1998 with

Resolved Question:

We loaned the owner of a restaurant $150,000.00 in 1998 with the understanding that he would repay on a monthly basis with a balloon payment at 10 years (we have a promissory note to that effect). The monthly payments stopped about 6 months ago and we haven't been able to contact the guy. The guy apparently has skipped town and, we think, has filed for bankruptcy.
What do we need to substantiate this as an uncollectible debt that we can claim on our 2010 tax return?
Submitted: 6 years ago.
Category: Tax
Expert:  Merlo replied 6 years ago.

Hello JA Customer,


There are no rules set in stone as to what you must provide to show that the debt is no longer collectible. Here is what the IRS says about a debt that cannot be collected:


"You can take a bad debt deduction only in the year the debt becomes worthless. You do not have to wait until a debt is due to determine whether it is worthless. A debt becomes worthless when there is no longer any chance that the amount owed will be paid. It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. You must only show that you have taken reasonable steps to collect the debt. Bankruptcy of your debtor is considered good evidence of the worthlessness of at least a part of an unsecured debt."


First, you may actually check to see if this person has filed for bankruptcy, assuming he did so in the state last known to you, which I assume is Oregon. Here is a link to a website where you can search by party name on bankruptcy filings in OR.


If you can find where he did file for bankruptcy, that in itself is sufficient proof that you would not be able to collect this debt. Even if you cannot verify the bankruptcy filing, the fact that you have tried to contact him through both his last known physical address and email address and have had no response for 6 months, that at least shows reasonable steps on your part to try and collect this debt.


Because this debt is so large, the only other thing I might suggest is that you contact an attorney just to see if there is any possibility of you filing a civil suit against this person. My guess is that without knowing his location, that would be next to impossible. However, getting confirmation of that from an attorney would be just another step that shows you took all reasonable efforts to try and collect this debt.


Remember that you will not actually have to submit proof of the steps you have taken when you file for this credit, but it would be good to have this info in your tax files just in the event you are ever audited and it were to be questioned.


If this was helpful please press the Accept button.


Thank you JA Customer



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