I would suggest going to Small Claims. Just keep in the back of your mind that, while you may win the judgment, you may not be able to collect. When you do get to court and a judgment is awarded, ask the court to set the payment terms before you adjourn. This is key as some people will pay a buck a month until eternity and there is nothing you can do about it unless the payment plan has been included in the judgment.
The other thing I would STRONGLY suggest is make sure that the information you use is 100% accurate. This will make the judgment easy to find by credit bureaus.
Is it worth it, somewhat. At the very least, you can claim the losses on your taxes for bad debts and have it justified.
Good post. Although you don’t need to go to small claims court to claim a loss on your taxes. You just have to make reasonable efforts to collect, wait long enough, and reach a point where it’s reasonable to assume you will never collect the money.
I wasn’t aware you could claim a bad-debts loss on your taxes unless you were using an accrual method of accounting… which I assume most service-based business are not doing? Now, expenses relating to the job - you would have had written off anyway during the cost of doing business. Tom
That’s true. If you are doing cash-basis accounting, you can’t deduct bad debt from your revenue because you never received the revenue in the first place. Expenses associated with servicing clients are deductible (if a legal deduction) regardless of whether you get paid or not.
In India we have something called consumer courts and they are pretty strong and have passed judgements against even the very big commercial organizations of India. Justice prevails.
Nice to hear that justice still prevails in your place. I think it’s otherwise here in our place. But I still believe justice prevails to the innocent ones. Hmmm:rolleyes: just keeping my fingers cross.
What you can do is practically forgive the debt once you get the judgment or within the period allowed by law (NY is about 20 years) and issue a 1099 under that person/entity name. Doing so will let you deduct it from you taxes and it is taxable to him.
Do you have a source for that information? Why would you issue a 1099 to someone under that circumstance? Why do you need the judgment at all? Why would the debt be taxable to him - it seems odd that you could simply send someone a 1099 and transfer the tax liability from yourself to them. If someone did that to me, I’d refute the 1099 immediately.
There seems to be no detailed description that describes when a debt is ‘bad’ and can be deducted. The IRS uses the language ‘worthless’ which is interpreted as meaning that that the debt has virtually no chance of being collected upon. It is NOT necessary to obtain a judgment against a debtor before you can deduct the debt. It may not even be possible to do that.
As far as the IRS is concerned, you pretty much have to be using the accrual basis (as pointed out a previous post) to take the deduction. This seems like a no-brainier since you really shouldn’t be able to deduct revenue from a bad debt when you never claimed the revenue in the first place, and unless your books are done by accrual this wouldn’t happen. There is an exception if you are on the cash basis but you’ve received some kind of instrument or note for the payment and it later fell through, but that is evidently rare.
I’m not aware of any special rules for New York, nor am I a tax attorney but I’m fairly confident that the above rules are correct. If anyone knows for sure I’d love to hear from them.
In response to Sagewing I am a landlord and a few years back I was able to secure a judgment against a tenant. Of course I was unable to collect and my accountant suggested to do what is called the Landlord revenge. Which I did. This is my basis for this statement. however law may change etc… you may want to consult your accountant and share with us. The key here is that you have a judgment which makes the debt legitimate and recognized by any government entity.
Ah yes I’ve heard of this one. That practice seems to be limited to the real estate industry. It makes little sense that it’s even possible. I am fairly certain that you can’t 1099 someone for services income legally, but there’s always a lawyer/accountant who will support just about any more.
you seem to miss the point. Once there is a judgment it is a legal debt due. And since you agree with me that it works for real estate because it is a judgment then it must work for any other type of commercial transaction. Of course one must seek the advise of a professional about these things. But we all know that professionals need to be pushed.
Glad we see eye to eye. Should you get information from an attorney, can you please share. But the best professional to get it from would be an accountant I believe.
I’ve noticed that accountants seem to have wildly varying opinions on this kind of thing, while attorneys are more consistent. For example, I got two incredibly different answers to the question ‘is this legally a capital gains loss, or a wash sale’ just this week from 2 CPA’s. My attorney cleared it up.
I would love an authoritarian answer to this question!
Let me put it another way for you.
When you have a judgment against party A
Party A has a liability. And you own an asset.
If you pardon the judgment to him then
Party A has an income (which qualify him to pay taxes) and you lost the asset which qualify for a tax deduction.
