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  1. #1
    Join Date
    Mar 2009
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    Question Creditor Tax Situation After Auto Loan Discharge

    My question involves bankruptcy in the state of: Florida

    A Father sells an automobile to his Son, records the sale and promissory note with the clerk of court. The title is in the Son's name with Father as the lien holder. After auto loan is discharged through bankruptcy, is the creditor/lien holder (Father) entitled to an income tax deduction (loss) or tax credit if the auto is not repossessed? If so, what tax form is the IRS expecting to see?

  2. #2
    Join Date
    Sep 2005
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    Default Re: Creditor Tax Situation After Auto Loan Discharge

    To deduct a bad debt arising from nonbusiness activities, such as a loan to a family member, you must be able to show (a) that you actively attempted to collect on the debt, and (b) that the entire remaining balance of the debt is uncollectable. You must also take the deduction in the year the debt became uncollectable. You would do this on a Schedule D with your itemized tax return.

    For this situation, though, you have a problem - if you just sit on your hands, you're not taking reasonable steps to collect the debt. The debt is secured by the vehicle. If the son ratified the debt, it's still due and payable. If not, you can repossess the vehicle and sell it to recoup your losses, consistent with your state's auto repossession laws.

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