Writing off bad debt on taxes

[MikeK1965]

What is the name of your state? IL

I loaned money to a friend two years ago. They pay on time some of the time and others they are late. I have had to track them down before and try to get answers and it can become aggrevating. I wrote an agreement myself to which my friend signed and dated but it was not notorized. I do have cancelled checks that he cashed proving it was a loan. He has been paying for just over two years and has a while to go. He still currently owes $4,000.

I am preparing myself for the invetiable as he has lost yet another job and was wondering if I do write off the debt as a bad debt, does this go on HIS credit report?

 

[Debt Guy]

Individuals cannot report tradelines to the credit reporting agencies. You can try, but they put up a lot of barriers.

 

[MikeK1965]

Writting off bad debt on taxes

Hello,

I don't want to report the individual, that is not my intent. HE is concerned that it will end up on his report from the IRS. What I have discussed with him is that because payment is all over the place at times and his financial situation is always horrid and currently getting worse, that I write off the debt. Logically and financially, it makes sense as he will not be able to pay. HIS concern is that this would be put on his credit record. I am doing the research for both or our sakes as I am trying to settle this as civily as possible. Would any of this be put on his credit report?

 

[Debt Guy]

I think you are mixing apples and oranges here.

The only way it gets on the credit report is if you report it to the CRAs. As I said, individuals cannot do that. The IRS will not report the debt to the CRAs.

The tax code requires him to report the debt as income if you forgive the debt. You are not required to send a 1099c to the IRS (only banks are required to do that).

Writing off (or chargeoff) of the debt is merely an accounting transaction. It is not the same as forgiving the debt.

If you write off the debt, he still owes it and you still have the right to collect it. You get to take your tax deduction subject to the appropriate limitations. He is not required to report the debt as income as he still owes the debt.

If you forgive the debt, he no longer owes it and you have no right to collect it in the future. He is required to report the forgiven debt as income unless he meets the requirements for waiver (see IRS Form 982) based on insolvency or bankruptcy.

I think you are both worried about nothing.

 

[MikeK1965]

Writting off bad debt on taxes

Debt Guy,

Thank you so much for clearing that up. I thought if I wrote it off then I gave up all rights to collect anything from him. Now I see that I can write it off, take the tax break and still try to collect from him. And he won't have to worry about it going on his credit report at all. This is what I was hoping for and am sure he was too.

Thanks so much for your input.