Do I Have ANY Recourse?

[Yellowsnow]

I just got notification today that an ex-friend has filed for chapter 7. I believe this means she doesn't want to pay anyone back and is looking to get out from under all her debt. Please tell me if I am wrong.

She owes me 7K and it was just a loan between friends, no paperwork and I have nothing to use to file a proof of claim. Other than the fact she must have listed me as a creditor because I got the letter. I never pressured her about the money or tried to collect. I knew she was getting her life back together.

Well, I guess she has gotten her life back together because she is now working at Microsoft and is marrying a wealthy man in 3 weeks. I'm sure her filing the BK before the wedding was one of the conditions. If I were him, I would have done the same thing.

Is there anything I can do? She is now financially better off than I am. Can I at least write this off my taxes because the government is allowing her to skip on her obligations? Yes, I know I should spend my last $100 and have stupid tattooed on my forehead. This has and will really hurt me. I was counting on getting my money back. Just goes to show you it isn't always some huge nameless corporation that loses money. People get hurt too.

I know this isn't usually the type of question posted here. Thanks for your help.

[HHM]

Legally, you probably have no recourse. The BK will extinguish any legal obligation she has to owe you the money. Now, if she is (or was) a "friend", you can always feel out her intentions; often times, with friends and family loans, the debtor will list them in BK because they have too, but then decide to pay them back after the BK.

But yes, you probably can write this off on your taxes, you will want to talk to a CPA on how, exactly, to do that.

[Yellowsnow]

Legally, you probably have no recourse. The BK will extinguish any legal obligation she has to owe you the money. Now, if she is (or was) a "friend", you can always feel out her intentions; often times, with friends and family loans, the debtor will list them in BK because they have too, but then decide to pay them back after the BK.

But yes, you probably can write this off on your taxes, you will want to talk to a CPA on how, exactly, to do that.

Thank you!

[BCA2009]

Not Deductible:

Genuine debt required: A debt must be genuine for you to deduct a loss. A debt is genuine if it arises from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money.

This is from IRS Publication 550.

There would have had to be an enforecable obligation to deduct the loss.

You could take the position that the verbal agreement was in fact an enforceable contract. But the IRS still won't allow it. You would have to appeal and then show some kind of evidence to back up your position.

If the IRS allowed this everyone and their brother would try to deduct "bad Loans"

[Yellowsnow]

Not Deductible:

Genuine debt required: A debt must be genuine for you to deduct a loss. A debt is genuine if it arises from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money.

This is from IRS Publication 550.

There would have had to be an enforecable obligation to deduct the loss.

You could take the position that the verbal agreement was in fact an enforceable contract. But the IRS still won't allow it. You would have to appeal and then show some kind of evidence to back up your position.

If the IRS allowed this everyone and their brother would try to deduct "bad Loans"

Thanks for your reply too.

Doesn't the letter from the bankruptcy court establish my position as a creditor? She had to list me as a creditor for me to get the letter, right?

Do I have any right to see what she says she owes me? What she listed?

[ja181]

Do I have any right to see what she says she owes me? What she listed?

Get yourself a PACER account and view the petition yourself. I believe there is no charge if you keep your usage under $10 per quarter, and it's $0.08 per page....

http://www.pacer.gov/reg_pacer.html

[Yellowsnow]

Get yourself a PACER account and view the petition yourself. I believe there is no charge if you keep your usage under $10 per quarter, and it's $0.08 per page....

http://www.pacer.gov/reg_pacer.html

Thanks! It's worth .08 per page to see what she said she owes me. I will print it all and use it for the IRS.

Great information.

[ja181]

just be careful. Pacer is addicting. I've used up $20 in 2 months =o

[keptdigging]

In general I think people are too timid on their taxes. If you believe you had an enforceable obligation, I'd add that to the evidence that you were included in the bankruptcy (so the debtor felt the same way) and pull together for my files any other evidence I had (did you write her check(s)? Did they say "loan" on them?) and deduct it as a bad debt loss.

Your worst case scenario is that the IRS challenges/disallows. At that point you can fight them or just cave. If you cave or lose you'll the cost to you (beyond paying the tax you would have paid anyway) is interest on the unpaid taxes. But your position is reasonable --you were owed the money. You didn't just invent something phony, hide income, etc.

Now the exception to this attitude would be if you're doing things on your taxes you shouldn't be and therefore you have good reason to be afraid of any IRS attention. But most people are the opposite, they're afraid to take deductions they're entitled to!

Remember, the audit rate for tax returns, while not zero, is very low.

[BCA2009]

In general I think people are too timid on their taxes. If you believe you had an enforceable obligation, I'd add that to the evidence that you were included in the bankruptcy (so the debtor felt the same way) and pull together for my files any other evidence I had (did you write her check(s)? Did they say "loan" on them?) and deduct it as a bad debt loss.

Your worst case scenario is that the IRS challenges/disallows. At that point you can fight them or just cave. If you cave or lose you'll the cost to you (beyond paying the tax you would have paid anyway) is interest on the unpaid taxes. But your position is reasonable --you were owed the money. You didn't just invent something phony, hide income, etc.

Now the exception to this attitude would be if you're doing things on your taxes you shouldn't be and therefore you have good reason to be afraid of any IRS attention. But most people are the opposite, they're afraid to take deductions they're entitled to!

Remember, the audit rate for tax returns, while not zero, is very low.

I don't disagree with keepmine, you can be as agressive as you feel comfortable with. If you don't get audited, that's fine. But the questions was "Is it deductible?" Under IRS regulations, it's not. A statement at some point in the future is not an enforceable agreement to repay. What were the terms of repayment? What interest rate?

I aslo feel that most people are too intimidated by the IRS to take certian positions that they are allowed to. But if you take a positon and it gets denied you will have to pay the tax back plus interest and penalties.

Like the home office deduction, I don't take it, even thought i could. I just don't think it's worth the hassle and potential risk of audit.

If you use a CPA, I don't think you could get him/her to sign your return, if you took this deduction.

In the firm that I worked at it would also not fly. We would state the rules and tell them we can't support the position.

I have helped alot of friends/family complete tax returns. In some circumstances ( like this one) I would tell them that they can take the deduction, but I won't sign the return. I'm not putting my neck out for an unsupported position.

This a good example of people not doing good planning. I cant count the times that if a client would have come to us before the transaction, we could have helped them structure it, where it would have been deductible. The friend of the OP that needed the 7K would have been glad to sign a note becuase she needed the money.

Years ago I borrowed money from my parents several times. We always wrote up a note and had it notarized. Takes a few minutes and pretects both parties in the event of something happening. We never considered non-payment, but what if I died, my parents needed a guarantee that they could collect from my estate. Or if they died they wanted proof so I would pay their estate so my siblings would not be short changed. We also deducted the interest (secured the note with my home even though it was unperfected).

I remeber one situation that cost a client $275K in taxes that could have been avoided had he structed the transaction in a different way. But a year later, when we found out about it, it was too late.