How should the lender treat personal loan to a person that's bankrupt for tax purposes? What...

How should the lender treat personal loan to a person that's bankrupt for tax purposes? What kind of loss is it?

Expert Solution

Personal loans from friends, family, or employers fall under common categories of debt that can be discharged in the case of bankruptcy. A discharge releases individual borrowers from the legal obligation to pay previously existing debts. Other types of dischargeable debt include credit card charges, accounts from collection agencies, medical bills, past due utility bills, and dishonored checks and civil court fees not deemed fraudulent.

When you make a personal loan and it becomes clear that there's no chance of repayment, it's considered a bad debt for Internal Revenue Service purposes.

A personal loan that becomes a bad debt can be considered a capital loss for tax purposes and used to offset capital gains and some ordinary income.

ekkarill92 answered 2 years ago

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