Uncollectible Small Claims Judgements

[dcgriswold]

Hi, I have three small claims money judgements in California. I have tried to collect on all three. Sought wage garnishment, bank levies, so far all to no avail. The judgements attain 10% interest penalty each year. I renewed the judgements after ten years. I continued each year to locate and find assets. I thought one day the debtors would get jobs. I believe it has become fruitless now. The original judgments totaled about 15K. Now with interest they total close to 40K. Can I write this uncollected debt on my taxes? If so how much and how to do? Thanks. dan

[Vanessa A]

It depends on what the claims were for.  If you lent money to people, then yes, you can claim it is a non business bad debt since they have become fully and totally worthless.  This would mean you would drop any forms of further trying to collect as you know they are no longer collectible.  

You cannot include interest or penalties.  Also, if the judgements had to do with a lawsuit or something else where you did not directly lose out on something YOU PUT IN, you cannot deduct this.  For example, if you went to a restaurant and had a bee in your burger and sued for $10,000 and won, that would not be something that you could claim as a non business bad debt.  

However, if you went to the restaurant and lent one of the employees $10,000 that $10k would be a non business bad debt that you would be able to deduct. 

[dcgriswold]

Thanks…one debris for a handyman not completing work, one is for damages by central unit tenant, one is for stolen business funds. Can I write off the entire amounts in 2024 return? And to clarify just the original amounts and not the legal interest penalties. Thanks again. dan

[Vanessa A]

For the handyman, if you were out cash, as in you paid him and he did not complete the work, then yes, you can include that.  
Stolen business funds would NOT be a non business bad debt, as it was related to a business.  This means it would have to be written off on your business return as a business expense.

Damages by central unit tenant?  Rental property?  This would also not be a non business bad debt.  The damages would need to be deducted on your Schedule E when you made the repair.

That is correct, you can NOT include the interest ONLY the amount of cash that you are actually out. 

[dcgriswold]

Thanks again…Can uncollectible small claims judgments in CA for personal loans be declared on tax return? Also I bought partial interest in the auto shop. I sold fairly quickly to get money out. It was bought with a contract I wrote up and we both signed. The owner collected the money from my buyer, but never gave to me. He subsequently went out of business and I attained money judgement. How is that handled at this point? Thanks for all. dan

[KeshaH]

If you had a personal loan that became uncollectible, you may be able to claim nonbusiness bad debt deduction. This would be reported as a short-term capital loss on Schedule D of your tax return.

For your auto shop situation, it sounds like you invested in a business, sold your interest, and never received the money even though you have a court judgment. This could‌ be treated as a capital loss since your investment became worthless.

In both cases, you'll need documentation to support your claim - such as the original loan agreement or investment contract, the small claims judgment, and evidence that the debt is uncollectible.

The timing also matters - you can only claim the deduction in the year that the debt became totally worthless. Since you mentioned you already have a judgment but can't collect, 2024 may be the appropriate year to claim the deduction if that's when it became clear you won't be able to collect. If, however, you knew in a previous year, you'll need to amend prior returns to include the loss.