Paying to learn a tough lesson
September 24, 2010 2:24 PM   Subscribe

How do I go about proving an uncollectible debt?

About August of last year I got a call from a woman who, up until recently, was my mentor. She said she'd been the victim of identity theft and she was in the process of moving and had no money for the deposit on the new apartment or to pay the movers. Now this is a woman who helped get me into college, who's always been eminently trustworthy and who I respected a lot.

I was, at that point, getting paid in cash for my job. And I was putting 1/4 of each check away to pay the taxes later. I told her I could take the money out of there but it would HAVE to be back by tax time. She said the bank was looking into the way the identity thieves got her money and she thought it would be replaced soon. So I loaned her 3200 dollars

Over the next few months I would call to check on her as a friend and also to get an update. I would offer to call the bank and look into it. I would offer to get experts to look into it. I was always rebuffed. Eventually what I did find out through her is that she had been compromised before. By people in croatia and poland. To the tune of tens of thousands of dollars. And possibly a couple of times. And now the bank thought she was in on it.

Do I think she was? No. She's a woman in her 60's. I think it's unlikely for her to get involved with this sort of thing. Do I think she's lying? Not necessarily. She uses her debit card online and on an old PC that probably has no antivirus software to speak of. She's older and she's proud and she's probably made some major mistakes here.

But one of the big ones was how she handled it with me. She dodged me and told me she'd loaned out thousands to people and never gotten it back. And as tax day drew near her plan was to borrow it from another friend of hers who was rich.

It didn't happen.

I had to borrow money from my boss to cover the money I loaned her and spent a good deal of time paying him off this year. It left me in a hole I just got out of.

She is a friend and, up till now, I could never imagine her doing this. In the interest of that friendship I asked if she could even pay some token monthly amount to pay me back. She agreed and then I didn't hear from her. When I finally did, she said she was now living with friends and I would someday get my money from her. But to stop pestering her about it.

When I brought it up to a friend - because I was just angry and talking - he said I could claim it as an uncollectible debt on my taxes and just be done with the whole thing. I asked my tax guy about it and he said I would need to prove I tried to collect on it. But if I did I could take a deduction for the amount

What's the bare minimum I would need to do in order to do this? I don't want to harass this woman but if it could be done simply with some notarized letters and such then I think I could put the whole thing behind me. Maybe someday I might be able to think about this woman without getting immediately angry.
posted by rileyray3000 to Work & Money (6 answers total)
When I brought it up to a friend - because I was just angry and talking - he said I could claim it as an uncollectible debt on my taxes and just be done with the whole thing. I asked my tax guy about it and he said I would need to prove I tried to collect on it. But if I did I could take a deduction for the amount

I'd be careful are running a fine line on fraud. She doesn't want to pay it and is trying to put the responsibility on you to be rid of a debt she owes. If you have your agreement in writing anywhere, even in Email, where she confirms that she accepted the money and just can't pay you back I'd take her to small claims court. I think that's safer than trying to write it off through the IRS because if you get audited (unlikely but certainly possible) you could be in deeper debt than she put you in already.
posted by ThomasBrobber at 2:42 PM on September 24, 2010

Response by poster: She's said that in email a couple of times already. I'm just hoping there's something I can do short of taking her to court
posted by rileyray3000 at 2:51 PM on September 24, 2010

From the IRS site:

Basis in bad debt required. To deduct a bad debt, you must have a basis in it—that is, you must have already included the amount in your income or loaned out your cash. For example, you cannot claim a bad debt deduction for court-ordered child support not paid to you by your former spouse. If you are a cash method taxpayer (most individuals are), you generally cannot take a bad debt deduction for unpaid salaries, wages, rents, fees, interest, dividends, and similar items.

When deductible. 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 generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt.

Non-business bad debt
posted by Zophi at 2:59 PM on September 24, 2010 [1 favorite]

Is taking her to court going to put any blacker a mark on your friendship than this rancid debt already has? I don't see how.

Take her to court, explain that it's nothing personal but that in order to make things right with your taxes you need to prove that you have done everything you can to collect. I'm so sorry, it must hurt a lot to be in this situation with someone you have greatly admired. But the time has come to look after yourself.
posted by hermitosis at 5:11 PM on September 24, 2010 [4 favorites]

It is amazing what that letter from small claims court can do to people. You may actually see money again. She is taking liberties with you likely because she believes you will not take any action. So take it.
posted by micawber at 9:26 PM on September 24, 2010 [1 favorite]

Since no one's mentioned it, it sounds to me like she's been taken in by one or more "Nigerian 419"-type scammers.
posted by alexei at 2:36 AM on September 25, 2010

« Older Help me buy ethically traded coffee   |   Babies are cute enough to start all over again! Newer »
This thread is closed to new comments.