Non Business Bad Debt

[Uncle Sam]

If a mother co-signs on a car loan for her son, and he defaults, and she's responsible for paying off the debt - can that be considered a Schedule D short term loss?

I am skeptical about this since the woman also wants to claim the son as a dependent - because he went to college full time for 5 months during the year - but the only item of support she didn't participate in is the college tuition. Another relative took care of that.

[erchess]

I am

skeptical also but on different grounds. Suppose that she were not his mother nor was he her dependent, would she be able to claim the loss given that she co signed the loan? Had he in that scenario borrowed money from her and defaulted on the loan under circumstances that prevented her from successfully suing him, then yes she would have a nonbusiness bad debt.

TTB says that the fact that he is her son does not preclude the existence of a true debtor-creditor relationship but that the claim is subject to extra scrutiny. TTB does not discuss the issue of dependency unless I am overlooking something. It does seem clear to me that she would have to explain what efforts she made to compel him to pay.

[dyne]

I would NOT allow a deduction. Money loaned (or paid for) a relative or friend is considered to
be a gift. Also the debt must be worthless. As long as the son CAN earn income, he can
pay her back and the debt is therefore not worthless. She should require the son to repay the debt to her. (fat chance). If she does not, it is a gift. I thought this would be simple to research, but it turns out it is not. I believe I found authority for this not being deductible years ago, but I could be wrong. Best wishes.

[Nashville]

Related Taxpayer

I would NOT allow a deduction. Money loaned (or paid for) a relative or friend is considered to
be a gift. Also the debt must be worthless. As long as the son CAN earn income, he can
pay her back and the debt is therefore not worthless. She should require the son to repay the debt to her. (fat chance). If she does not, it is a gift. I thought this would be simple to research, but it turns out it is not. I believe I found authority for this not being deductible years ago, but I could be wrong. Best wishes.

I think the doctrine of "related taxpayer" defeats any attempt on the part of the mother to take a loss on the loan. Clearly, a gift was not intended either. Not the first mother to lose big-time by sticking her neck out for children.

I am amazed at how many people co-sign loans. Even if you wish to help someone there are better alternatives than this.

1) If a co-signer is required, that tells you right up front that the debt applicant is someone that the banks have already given up on.
2) Knowing someone else will pay if he defaults gives him less incentive to make payments to avoid repossession.
3) In the event of a total default, the co-signer has no rights of subrogation. The lender still has a lien on the car, or some other collateral, and the co-signer doesn't have anything! Even if co-signer pays off the whole loan, the collateral is released to the borrower.

Sorry, Mommas of the World. You think you are helping but the best help you can give would be for kids to meet their own needs. There ARE ways to help, but allowing a trap door for them to escape responsibility is not among them.

[Uncle Sam]

Non-Business Bad Debt

The car was repossessed and sold in December 2008.
The mother received a balance due notice from the lender.

[Uncle Sam]

Non-Business Bad Debt

I have convinced my client to forget about this "bad debt".
Hallelujah.

[erchess]

If I were advising this mother

I would tell her not to forget about nor allow her son to forget about this debt. I would instead have her add compounded interest akin to credit card rates to the debt until it was paid. On any occasion when she would otherwise have given him a gift, I would have her credit him with a payment. If she were in a position to leave him anything at her death I would have her arrange for the remainder of his debt to be deducted from what he got and given to a charity. I would have her do that if I could not get her to exclude him from her will entirely. I would of course have her co sign no more notes with him.