Submitted By: Winifred
Answered: April 11, 2016 12:14 pm

I loaned money to a developer who went bankrupt. I was supposed to get interest on the loan. Can I deduct the principal plus interest?

You can deduct the unpaid principal if you can show that the debt is fully worthless. The fact that the borrower filed for bankruptcy does not automatically establish worthlessness. However, even if you can establish worthlessness, you can only deduct the unpaid principal. As a cash basis taxpayer, the interest you were to receive was never reported as income so no bad debt deduction is allowed for this amount.

Tax Glossary

Qualified domestic relations order (QDRO)

A specialized domestic relations court order that conforms to IRS regulations and provides instructions to pension plan administrators and IRA custodians as to how to pay benefits to a divorced spouse.

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