Recovering Unrecovered Small Claims Judgment through Schedule D?

[brucefon]

What is the name of your state?
Massachusetts


I searched "bad debt" on irs.gov and was referred to Schedule D.

Bad debts are either business and nonbusiness.

There is a reference in Publication 550, pp 53-54 that one can claim
Insolvency of Contractor unrecoverable debt on Schedule D
as a loss.

Has anyone ever tried this as a way to recover debt?

 

[abezon]

You don't recover a bad debt, you write it off. You can't write it off until it has become uncollectible for practical purposes. That means you have to exhaust your other collection options, like hiring a professional debt recovery outfit to harrass the debtor. The debt recovery company will take 25-35% of whatever they collect, giving you 65-75% in your pocket. Writing off the debt gives you (probably) 15% of the debt in the form of reduced taxes.

 

[brucefon]

So, in simple terms, with a collection agency or judgment buyer and filing Schedule D, someone could, in effect, get 80% of their judgment back?

 

[abezon]

NO. With Schedule D, you get at most 15% of your judgment back (the tax savings for the debt. With a collection agency, you get at most 70% back, assuming a 30% commission.