Loss on personal loan

[JACKSORH]

A client of mine co-signed for a relative. The amount was substantial and my client ended up paying the loan off. She did not derive any benefit from loaning her relative this money. Can she declare a loss on her personal income taxes if any? The relative filed bankruptcy to get rid of this debt that she owed my client.

Thanks,

Jacksorh

[jainen]

>>The relative filed bankruptcy to get rid of this debt that she owed my client.<<

You mean that when your client paid the creditor, the debtor signed a new loan agreement with your client, and then immediately (within the same tax year) convinced a court to discharge it?

[JACKSORH]

>>The relative filed bankruptcy to get rid of this debt that she owed my client.<<

You mean that when your client paid the creditor, the debtor signed a new loan agreement with your client, and then immediately (within the same tax year) convinced a court to discharge it?

My client didn't sign a new loan agreement with her relative(debtor). My client ended up making good on the loan to the intial creditor since she was a cosigner and her relative later filed bankruptcy so that my client couldn't get her money.

[lbbwest]

My client didn't sign a new loan agreement with her relative(debtor). My client ended up making good on the loan to the intial creditor since she was a cosigner and her relative later filed bankruptcy so that my client couldn't get her money.

Personal loss; Schedule D, subject to normal cap loss rules (3000) per year, can carryforward loss not utilized by offsetting capital gain. lbb

[bay]

I would not classify it as a personal loss - when your client "co-signed" they were equally legally liable for the debt. If your client loaned the other person money and had a note signed and then that person filed bankruptcy then you have a bad debt that I would deduct but not under the circumstances in your original post

[lbbwest]

I would not classify it as a personal loss - when your client "co-signed" they were equally legally liable for the debt. If your client loaned the other person money and had a note signed and then that person filed bankruptcy then you have a bad debt that I would deduct but not under the circumstances in your original post

Topic 453 - Bad Debt Deduction

If someone owes you money that you cannot collect, you may have a bad debt. For a discussion of what constitutes a valid debt, refer to Publication 550, Investment Income and Expenses, and Publication 535, Business Expense. To deduct a bad debt, you must have previously included the amount in your income or loaned out your cash. If you are a cash basis taxpayer, as most individuals are, you may not take a bad debt deduction for income you expected to receive but did not because the amount was never included in your income. For a bad debt, you must show that there was an intention at the time of the transaction to make a loan and not a gift.

There are two kinds of bad debts – business and nonbusiness. A business bad debt, generally, is one that comes from operating your trade or business. A business deducts its bad debts from gross income when figuring its taxable income. Business bad debts may be deducted in part or in full.

All other bad debts are nonbusiness. Nonbusiness bad debts must be totally worthless to be deductible. You cannot deduct a partially worthless nonbusiness bad debt. You must establish that you have taken reasonable steps to collect the debt and the debt is worthless. It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. You may take the deduction only in the year the debt becomes worthless. A debt becomes worthless when the surrounding facts and circumstances indicate there is no longer any chance the amount owed will be paid. You do not have to wait until a debt is due to determine whether it is worthless.

A nonbusiness bad debt is reported as a short–term capital loss in Part 1 on Form 1040, Schedule D (PDF). It would be subject to the capital loss limitations. A nonbusiness bad debt deduction requires a separate detailed statement attached to your return.

For more information on nonbusiness bad debts, refer to Publication 550, Investment Income and Expenses. For more information on business bad debts, refer to Publication 535, Business Expenses.

[Pacun]

No one owed your client any money. She owed the company and she paid. She co-sign the debt and there is no place to deduct it.

I tell my clients NOT to co-signed anything. From the moment a co-signer is needed, you know that the person is living above their means and you will be responsible.

[jainen]

>>her relative later filed bankruptcy so that my client couldn't get her money<<

The bankruptcy had nothing to do with her money; only debts specifically identified by the court are affected. Not putting in a claim is proof that she wasn't owed money. Since your client never had an agreement to be repaid anyway, she lost nothing when she wasn't repaid.

[lbbwest]

>>her relative later filed bankruptcy so that my client couldn't get her money<<

The bankruptcy had nothing to do with her money; only debts specifically identified by the court are affected. Not putting in a claim is proof that she wasn't owed money. Since your client never had an agreement to be repaid anyway, she lost nothing when she wasn't repaid.

I misunderstood, AGAIN; I thought that the deadbeat listed THE CLIENT in the bankruptcy for the amount THE CLIENT paid on the debt. lbb