Deducting uncollectible debt

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 the amount owed will be paid. You are allowed to write off that debt, for tax purposes, when you meet the following criteria.

1. Show that you took reasonable steps to collect debt. 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.

2. Show that there is evidence of bankruptcy, which is generally good evidence of the worthlessness of at least a part of an unsecured debt.

3. If you receive anything, such as property, as partial settlement of a debt, reduce the debt by the fair market value of the property received. You can deduct the remaining debt as a bad debt if and when it becomes worthless.